ACM Update 25-03-24
The Bank of England held interest rates again last Thursday, but the devil was in the detail. This led to sterling being on the back foot, losing 1.8% against the Dollar by Friday lunchtime. Expectations are now high for a June rate cut from Bailey & Co, especially with inflation continuing to fall back.
In the US, the Federal Reserve also held interest rates and realigned expectations for the number of rate cuts to come there in 2024.
A four-day week ahead of us, with most major markets closed on Friday (and next Monday) for the Easter break.
A brief reminder to all of our clients that the Aston offices will be closed on Friday 29th March and Monday 1st April for the Easter bank holiday weekend in the UK.
It was central bank meetings aplenty last week, as the battle to tame inflation but not strangle respective economies, continues. Most developed economies are now seeing inflation falling back sharply following the energy price rises of 12 months ago. These are thankfully now beginning to subside. We did see an interest rate cut from one corner of the G10 last week, but perhaps not from where you might think.
Starting off in the UK, with 2024 starting to look slightly rosier economically than the end of the previous year, a slightly more optimistic mood is filtering through about market conditions. This was further compounded by headline inflation for February dropping back to 3.4% and means the cost of living in the UK is rising at its slowest since September 2021.
Food and drink prices were key factors behind the fall, but accommodation costs and fuel prices are still rising rapidly. In fact, property rentals jumped by 9% in the year to February, which was their biggest annual increase since they started being measured in 2015. So, whilst inflation is slowing, some aspects remain expensive.
Indeed, Retail Sales data released last week showed zero growth from January to February in high street spending. With average earnings data now running at least two percentage points ahead of inflation, consumers are still not yet feeling comfortable enough to spend heavily.
All of these data releases would have come as no surprise to the Bank of England’s Monetary Policy Committee in making their latest rate announcement last Thursday. Whilst news headlines would have confirmed a widely-expected hold in policy and eight of the nine members voting in favour of this, the story behind it has shifted seismically.
Prior to Thursday’s meeting, markets had expected rates to remain at their current 16-year high until the August meeting, whereas that has now been realigned to June. The move of the two members (Catherine Mann & Jonathan Haskel) who wanted a hike last time, now joining the majority in holding rates, signals how quickly the sentiment of the MPC is changing.
Governor Andrew Bailey stressed that inflation is moving in the right direction for rate cuts, but wouldn’t be forced to commit to timing. Markets sold off sterling heavily on Thursday afternoon which continued into Friday, seeing GBP lose a total of 1.8% in 24 hours against the US Dollar. If the Bank of England do suddenly shift to being the first of the big three central banks (along with ECB & Federal Reserve) to cut interest rates in June, this could well be detrimental to sterling over the coming months.
In terms of other data releases, Services PMI figures were slightly down on forecast, whilst the equivalent Manufacturing numbers showed an increase, recording 49.9 for March. This was the best reading for the sector since July 2022.
Movements last week for the Pound against the US Dollar can be seen in the chart below:
As with the UK, a hold in US interest rates from the Federal Reserve doesn’t tell the full story of their Wednesday policy meeting. Members were supposedly unanimous in their decision to keep interest rates on hold, but markets were more focused on the narrative from Chairman Jerome Powell as to what to expect over the coming months.
As recently as a few weeks ago, I wrote that the Federal Reserve seemed the most likely to be cutting interest rates first, which as eluded to above no longer seems to be the case. Whilst Powell felt it would be appropriate to begin to slow interest rates “fairly soon”, they didn’t see fit to make any changes as of yet. This falls in line with recent comments from Fed members, about the greater economic risk being to cut too soon.
Fed officials are now forecasting three interest rate cuts in the US this year on the “dot plot”, down from the six which had been expected at the turn of the year. Widespread interest rate cuts were expected to be the norm worldwide in 2024 and now these have been scaled back, the Dollar’s status as the world’s reserve currency seems to have been restored.
One would expect the Dollar to remain more stable for now, unless the Fed have to act quickly to deal with a slowly increasing unemployment rate. A shift in the jobs market has long been a yardstick for the committee to act. An upwardly-revised growth forecast of 2.1% for 2024, also helped the Dollar-resurgence last week.
Eurozone inflation meanwhile continues to trickle downwards. The metric now stands at 2.6%, despite a bump in the road in the December numbers. It is exactly such movements that Christine Lagarde remains wary of, in not cutting headline interest rates too soon.
During a Eurogroup summit speech last week, the ECB President continued to exercise caution when asked about the possibility of an interest rate cut in April, rather than waiting for June. She commented, “we will have more data in April, but we will still have a lot more data in June”. Frankfurt expects growth to begin to increase in the second half of 2024, mainly linked to an increase in purchasing power (falling inflation).
As such, the ECB were cautious in their most recent growth forecasts, revising them down a few weeks ago. They project 0.6% growth for 2024, 1.5% in 2025 and 1.6% in 2026. PMI Manufacturing numbers released last week didn’t paint the best of pictures, but thankfully the Services sector (making up the majority of the Eurozone economy) was better than expected.
As eluded to earlier in this article, we did see an interest rate cut from the Swiss National Bank last week, becoming the first G10 country to do so. Being one of the few central banks to only meet quarterly, the SNB reduced their headline rate from 1.75% to 1.50% on Thursday morning.
In Japan meanwhile, the Bank of Japan opted to end the world’s last negative interest rate.
Overall, narrow ranges last week on Sterling-Euro, but the pound does now seem to be more on the back foot than we have seen for a while, as we edge seemingly closer to a June rate cut from the Bank of England.
The latest GBP-EUR chart is below:
The week ahead:
Monday – Fed Bostic speech (12:25 UK time), MPC Mann speech (14:15)
Tuesday – US Durable Goods Orders (12:30), US Consumer Confidence (14:00)
Wednesday – Australian CPI inflation (00:30), Fed Waller speech (22:00)
Thursday – UK Final GDP Q3 (07:00), Canada GDP (12:30), US Final GDP (12:30)
Friday – UK BANK HOLIDAY (Aston offices CLOSED), Fed Powell speech (15:30)
A much quieter week this week as markets ease into the Easter long weekend. The Aston offices will be closed on both Friday and Monday as a result of the UK bank holidays.
Monday afternoon’s speech from MPC member Catherine Mann could well be telling for the prospects of UK monetary policy to come. With Mann being one of the two policymakers who shifted from a hike to a cut in last week’s meeting, her comments as to why and her future voting thoughts will be interesting to hear. Watch out for GBP volatility surrounding this event.
The final confirmation of UK GDP for Q4 of 2023 will emerge on Friday morning. This should just be a formality, reaffirming the UK recession closing out last year.
For those focussed on the US Dollar, there are a range of speeches throughout the week from Fed members. These include an event with the Fed Chair Jerome Powell on Friday afternoon, which as always will be watched with interest.
As always, reach out to the team if you have any upcoming requirements to discuss.
Have a Happy Easter!
