ACM Update 24-06-24
The third week of June was all about UK data, with the latest inflation release and the Bank of England rate announcement dominating headlines. As expected so close to the election, the MPC held rates despite inflation now being back at their mandated 2.0%.
The final week of the month is light on data, but also signals the end of the first half of the year. Friday afternoon therefore could see some movement via month end flows and profit taking. This week most importantly sees the run-up to the first round of French elections taking place on Sunday.
The Bank of England's Monetary Policy Committee are now the first of the "big three" central banks to have inflation back to its mandate. With US inflation still sticky and the Eurozone equivalent showing little movement, UK CPI inflation in May was confirmed as 2.0% on Wednesday morning. This marked the first time CPI inflation has hit the Bank’s target, since August 2021. The drop in May’s reading was primarily driven by a fall in food and drink prices, however prices are still a full 25% higher than at the start of 2022.
However, despite inflation being back on track, the MPC saw no further requirement to cut the headline interest rate in this meeting. The nine members voted 7-2 (the same pattern as their last meeting) in favour of a hold. There are a number of valid reasons behind the lack of action from Bailey and Co:
- With the Bank of England being an independent organisation, they generally keep out of politics. Given the looming UK election just two weeks after this meeting on 4th July, it would have been a surprise to see a cut.
- Wage inflation in the UK remains high, with the most recent Average Earnings Index reading of 5.9%, well above the 2% CPI figure.
- Services sector inflation remains high at 5.7%, especially important given how much of the overall economy this makes up.
- Core CPI inflation is also considerably higher than the headline figure, suggesting things aren't fully under control quite yet.
The next MPC meeting comes on 1st August, by which point (hopefully) all election narrative will have disappeared. We will also have had a further round of inflation data by then to digest. Expectations of a cut have certainly risen for that meeting, so watch this space.
The latest round of retail sales data also arrived on Friday morning. This showed a surprising jump of 2.9% from April to May, another release which demonstrates the spending power of the UK consumer at present. Wages outrunning inflation (thus greater spending power) could easily see prices rising in the UK through increased demand. This is precisely what certain MPC members have for some time been concerned about, known as the "second round effects" of inflation. Consumer confidence figures reaffirmed this, with a third monthly increase in a row.
The UK's latest Manufacturing and Services PMI numbers were slightly under expectation, but both in expansionary territory.
Despite the two significant events on Wednesday and Thursday, sterling's movements versus the Euro were limited during the week, mainly as both big releases went as expected.
The weekly Sterling-Euro chart can be seen below:
As already eluded to, Eurozone inflation has remained around the current levels for some time now. The latest Flash CPI inflation release arrived last week and confirmed such, with another reading of 2.6% for the bloc. Last week I mentioned the general sentiment that the ECB may have over-promised with their rate cut at the start of June, and this is looking increasingly the case.
Despite a considerable fall during 2023, Eurozone inflation has stagnated between 2.4% and 2.9% since November of last year. The lack of progress in a downward direction is certainly of concern for some ECB committee members and as a result we expect a hold in rates during their next meeting on 18th July.
The ECB also released their Economic Bulletin last week, a snapshot of current economic conditions. Amongst the usual comments about “determination” to bring Eurozone inflation back to target in the medium term, Frankfurt were proud to confirm that “after five quarters of stagnation, the Euro area economy grew by 0.3% during the first quarter of 2024”. A positive step indeed.
Other European releases were mixed. The ZEW Economic Sentiment figure for the bloc came in at a positive 51.3 which was also above the expected figure.
On the other side of the coin, the latest round of PMI figures all came in well under their estimates. French figures especially seem to have taken a pessimistic dive since the looming election was called by Macron, but the Eurozone figures as a whole were poor too. The Services sector continues to outperform the Manufacturing equivalent.
Over in the US a very quiet week in terms of data and events, either side of the Juneteenth public holiday that took place on Wednesday.
Retail Sales in the States seem to have flatlined recently too, perhaps under the weight of higher interest rates impacting the spending power of homeowners. The metric for May came in at a growth of 0.1% versus the month before.
Industrial Production figures were positive and demonstrated a monthly growth of 0.9%. The Manufacturing and Services PMI figures were much better than their European Counterparts though. Both were expansionary as well as above expectation at 51.7 and 55.1 respectively.
This left the floor for the usual smattering of comments from Federal Reserve members. As has been the case of late, members reaffirmed that more evidence of cooling inflation is required before interest rates are to be cut. Bank of Philadelphia President, Patrick Harker, went a step further in saying he wants to see “several” more months of improving inflation before a rate cut, of which he only sees a requirement for one this year.
A more volatile week for GBP-USD than elsewhere. Movements can be seen in the chart below:
The week ahead:
Monday – Fed Waller speech (08:00 UK time), German IFO Business Climate (09:00), Bank of Canada Governor Macklem speech (18:45), Fed Daly speech (19:00)
Tuesday – Canada CPI Inflation (13:30), Conference Board Consumer Confidence (15:00)
Wednesday – Australian CPI Inflation (02:30)
Thursday – Bank of England Financial Stability Report (10:00) & Andrew Bailey speech (10:30), US Final GDP (13:30),
Friday – UK Final GDP (07:00), Spanish Flash CPI (08:00), US Core PCE Price Index (13:30)
A quieter week in terms of market data releases this week to close out H1 of 2024. From a UK perspective, the release of the latest Financial Stability Report and subsequent speech from Andrew Bailey will be closely watched. This will be more in case Bailey makes comments regarding ongoing policy action for the Bank of England. The Final GDP reading on Friday morning is also of importance, expected to confirm a quarter-on-quarter growth of 0.6% for Q1. Expect Sunak to be using this one to his advantage if so!
US news will similarly be about the Final GDP figure, here expected to show 1.4% growth in Q1. The number looks impressive alongside the UK equivalent, but is well down on the 4.9% and 3.4% of the two quarters prior. The Federal Reserve’s chosen inflation matrix of Core PCE follows on Friday afternoon, expected to show a slight 0.1% monthly uptick. Any deviance either side of this will produce some Dollar volatility.
On the European side of the equation, eyes will rightly be on the build up to the first round of the French elections. Ongoing far right gains have been reported recently, and such a move would likely cause nervousness in the Eurozone as a whole. Watch this space.
Do reach out to the team in relation to any queries you may have and we will be here to assist. Prices are likely to be more volatile this week as we run into month/quarter/H1 end.
Have a great week.
