ACM Update 26-06-23
UK economics and monetary policy are back under the microscope. The latest inflation numbers showed no drop in CPI figures, which the Bank of England chose to follow up with a move back to the jumbo rate hikes of 2022. Are interest rate hikes the answer to these supply-side issues though?
This week we will hear from all the major central bank heads, at the ECB Forum on Central Banking in Sintra, Portugal. Each differ with their positions in the fight against inflation, but their comments will drive their respective currencies as we close out June.
The Old Lady of Threadneedle Street, or the Bank of England as they are better known, were the main headline-grabber last week. Andrew Bailey and his fellow MPC members have spent the last two years trying to bring inflation back under control, with a series of interest rate hikes. After the drop from 10.1% to 8.7% the previous month, hopes had been high for further improvements on the inflation front.
However, following price rises in air fares, package holidays and other services sector related activities, inflation remained stubborn at the same level as the previous month. Whilst food prices did increase, this was only fractional when compared to previous monthly gains.
The inflation figure for May of led to a somewhat unexpected knee-jerk return to the half per cent rate hikes the Bank of England had been implementing throughout 2022. This caught markets by surprise and did deliver a temporary boost to GBP, with the currency briefly viewed as a good candidate for investment returns. However, Bailey’s comments that the economy may need to fall into recession to get inflation back down, were enough to end the short-lived GBP rally. He also made comments similar to the Bank’s Chief Economist, Huw Pill, chastising those asking for pay rises as a major contributory factor to inflation.
Former MPC member Danny Blanchflower maintains his stance that supply-side shocks will not be fixed by interest rate hikes. He is still firmly of the belief that Brexit is partly to blame for making it difficult to import food, meaning price levels have remained higher for longer than elsewhere. Blanchflower believes the Bank of England should be cutting interest rates as soon as possible rather than raising them, a view shared by two other members of the current rate-setting committee.
Other UK releases were a mixed bag, but enough to see GBP-Euro nudge up to match the 10-month highs seen the previous week, breaching 1.17 on a number of occasions. Retail sales numbers released on Friday, came in better than forecast at 0.3%, showing consumers are still willing to spend despite the cost of living increases. Confidence in the Manufacturing and Services sector though seems to be lacking, with both metrics lower than expected for June.
You can see the latest movements on GBP-EUR in the chart below:
All was fairly quiet on European shores last week to be honest. President Christine Lagarde spoke in Paris, but this was a speech more regarding the impact of climate change than anything specifically economic.
The raft of PMI data releases on Friday though were a pretty poor showing for the Eurozone. Figures from France, Germany and Europe as a whole, were significantly lower than had been hoped in the Manufacturing and Services sector for June. Confidence seems to be fairly low across the board in the bloc at the moment, and the above data led to a weakening of the Euro versus the Dollar of circa 1.5% from Thursday to Friday.
In the US, as mentioned last week had a quiet start due to the Juneteenth bank holiday. Data releases were also relatively sparce with the weekly release of Unemployment claims on Thursday the main talking point. These came in fractionally worse than expectation at 264,000 which was the joint-worst for the last 18 months.
Besides that, Jerome Powell had a busy week testifying to the House and Senate on Thursday and Friday respectively. His notable comment when quizzed on interest rate hikes being that the Fed are “at least close to where we think our destination is”. Ongoing policy was guarded but summed up as “it only makes common sense to move at a careful pace”. Not many further clues there, but the Dollar gained circa 1% against GBP, rebounding on the week before.
Moves can be seen in the chart below:
Elsewhere, we had a somewhat unexpected interest rate hike from the Norges Bank in Norway. Like the Bank of England, they chose to hike by half a per cent, boosting the NOK by over 1% versus the Euro. Their interest rate is now at its highest in 15 years.
The Swiss National Bank also opted for a rate hike but theirs was just a modest 0.25%, in line with expectation.
The Reserve Bank of Australia’s latest minutes showed their last meeting was finely balanced in terms of a rate hike decision. This has (for now) cooled expectations of further rate hikes.
The week ahead:
Monday – German IFO Business Climate (09:00 UK time), Christine Lagarde speech (18:30)
Tuesday – Canadian Inflation CPI (13:30)
Wednesday – Australian Inflation CPI (02:30), ECB “Policy Panel” featuring ECB’s Lagarde, BoE’s Bailey, Fed’s Powell, BoJ’s Ueda (14:30)
Thursday – UK Mortgage Approvals (09:30), US Final GDP q/q (13:30), MPC’s Tenreyro speech (17:30)
Friday – German Retail Sales (07:00), UK Final GDP q/q (07:00), Eurozone CPI Flash Estimate (10:00), Canadian GDP m/m (13:30)
So a relatively quiet week in terms of major data releases as is often common for the last week of the month. Most of the focus in the UK will remain on the fallout from last week’s interest rate hike and how this impacts markets. Interest rates remain high, but confidence in the economy low, which is a challenging combination.
Clients looking to sell GBP and buy Dollars or Euros are still facing excellent opportunities up close to year highs on both pairs. Sterling’s trend will largely be driven by consensus on whether these rate hikes remain the right idea. Despite Rishi Sunak’s insistence that “everything is going to be OK”, the jury is still out on that one for now.
With Friday being the last day of the quarter and indeed first half of the year, we could well be in for some interesting movements as positions are closed out. Something to keep an eye on.
Have a great week.
