ACM Update 27-08-24
The Federal Reserve Chairman Jerome Powell has finally produced the magic words, “the time has come for policy to adjust”. His words came on Friday afternoon during a keynote speech at the Jackson Hole Symposium and helped in taking GBP-USD to its highest level since March 2022. One could say we are beyond the “Definitely Maybe” stage now from the Fed…
With a UK bank holiday yesterday, followed by a lighter week of data to come, we can expect the post Jackson Hole analysis to continue as markets adjust expectations accordingly on upcoming US monetary policy.
The Federal Reserve don’t generally declare their policy plans at the Jackson Hole economic summit. Nor have they ever previously cut interest rates with their economy creating such positive growth. But past form went out the window last week in Wyoming as the Fed essentially pledged their next move to the world via Chairman Powell.
The Dollar was already on the back foot by the time Powell took to the stage on Friday afternoon, with interest rate cut expectations having been heightened for some time now. In fact, the Dollar has now lost over 4.5% in less than three weeks versus GBP and almost 4% versus the Euro.
Earlier in the week, Wednesday evening’s latest Fed meeting minutes revealed a considerable amount of discussion regarding cutting rates in their 31st July meeting. In the end, the committee were unanimous in their decision to hold rates, but the mere talk of cuts was enough to see the Dollar already on a downward trend midweek. Naturally, declining inflation and weaker than expected jobs figures recently, were a sign for many policymakers that action was needed.
Even before Powell himself had spoken, two of his fellow Fed colleagues had already announced they felt it right for easing to begin soon. Both suggested that such a move should be “gradual and methodical”. But despite the Fed Chairman suggesting cuts are coming, he offered little as to how quickly or how far headline rates in the US would be coming down. That said, he didn’t rule out large cuts, stating “we’ll go 50 basis points if we feel like it is needed”.
Markets though seem to be pricing in an aggressive series of rate cuts, with a full 1% of cuts in total from the year’s remaining three meetings. Bloomberg commentator Mohamed El-Erian disagrees however, citing concerns that markets are expecting such large rate cuts without much in the form of substance behind them. His expectation is for a quarter-point cut at each of the meetings (Sep/Nov/Dec), which seems a more measured approach. That is, barring any drastic changes in the jobs market and/or inflation.
On the political front, Kamala Harris formally accepted the Democratic nomination at the party’s national convention in Chicago. She pledged a “new way forward” for Americans in creating an “opportunity economy”. On the Republican side, the challenge for Trump’s entourage seems to be getting him to stick to policy when on stage, rather than throwing personal insults at his opponent.
US data-wise, remarkably there was little of note aside from the latest round of Manufacturing & Services PMI figures. The latter continues to produce favourable numbers, whereas Manufacturing performance fell to its lowest in 12 months, and well under expectation. Higher interest rates are potentially a factor here.
With geopolitical tensions escalating in the Middle East over the weekend, we can expect the Dollar to also be driven by movements of this nature during the week. The greenback will see an impact from commodity price shifts too, especially if oil prices continue to fluctuate wildly off the back of these events.
Overall, a big week for GBP against the Dollar, climbing 2.5% in one of its biggest weekly gains for some time. With the pair at its highest in 29 months, this presents an excellent opportunity for Dollar buyers. Recent moves can be seen in the chart below:
The Bank of England Governor, Andrew Bailey, was also at the central banker’s get-together in Jackson Hole last week. He spoke shortly after Powell on Friday afternoon, with the speech barely making headlines such was the significance of the Fed’s announcement. However, his comments were just as important for those on this side of the pond and provided an insight into what is to come from the Bank of England.
Bailey suggested it “too early to declare victory” over inflation, although the so-called second round effects have been smaller than he and his colleagues had expected. The major takeaway was the Bank of England head declaring that they would “be careful not to cut interests rates too quickly or by too much”.
The comment offered major stability to sterling from an investment perspective, given the differing policy stance declared just before by his US counterpart. A September rate cut from the BoE is now seen as just a one in three chance, a move which further supported GBP. The currency also gained versus the Euro last week too, recovering lost ground from earlier in the month to achieve its highest level since the BoE cut interest rates on 1st August.
A UK survey from market research firm GfK, last week suggested that Brits are becoming increasingly optimistic about their financial situation, following the aforementioned rate cut earlier this month. This is not too much of a surprise given wages have been rising by more than inflation for a year, alongside inflation itself cooling off and mortgage costs expected to fall.
Sir Keir Starmer meanwhile is set to warn in a speech on Tuesday that “things will get worse” in the UK before they get better. One wonders if this is an interesting choice of language given the memorable Sunak election call of three months ago, in torrential rain with the D:ream anthem “Things Can Only Get Better” in the background.
The new PM is expected to continue his stance that the last Government masked the true state of public finances, in what many are suggesting is just a warm-up act for tax rises to come in the 30th October budget. The suggested “£22bn black hole” declared by Chancellor Rachel Reeves, isn’t going to fill itself easily, regardless of how quickly interest rates come down.
It was also a quiet week in the UK for data releases, with just the UK equivalent of the Manufacturing and Services PMI releases. Both are performing well in August, with Manufacturing a real standout hitting its most positive reading in 26 months.
For European news, the ECB were not at the Jackson Hole summit. One must assume that Lagarde and her colleagues are still enjoying their summer break too much to make the trip. However, there were plenty of hints from their own information releases to give an idea on upcoming policy.
The Bank seems to have learnt from its overpromising earlier in the year and policymakers are being coy on their intentions for the upcoming September meeting. The minutes from the mid-July meeting noted a more cautious tone on growth and reiterated that inflation remains stubborn in the services sector. It was also clear that anything is possible from their next gathering, suggesting it should be approached with “an open mind”. It does however look likely that the Bank will have to revise their own growth figures for 2024 & 2025.
The September decision thus looks like a complicated one. One policymaker last week to comment on current events was Martins Kazaks who declared himself ready to discuss another rate cut in three weeks’ time. Markets are for now projecting a further rate cut at the meeting.
Economic data releases from the bloc were also sparse. The Final CPI inflation release for last month confirmed the metric at 2.6%, offering little in the way of progress towards the ECB’s target. PMI figures offered some positivity, especially in the Services sector. However, a lot of the optimism came from the French figures which will have benefitted heavily from the “Olympics effect”. Such one-off factors will muddy the water for policy decisions in the bloc but a cut seems the most likely outcome for now.
Sterling’s recovery against the Euro this month can be seen in the chart below:
The week ahead:
Monday – UK BANK HOLIDAY, German IFO Business Climate (09:00 UK time)
Tuesday – BRC Shop Price Index (00:01), US Conference Board Consumer Confidence (15:00)
Wednesday – Australian CPI inflation (02:30), Fed Waller speech (06:15), Fed Bostic speech (23:00)
Thursday – SPA Flash CPI & GER Prelim CPI (08:00), US Prelim GDP & Unemployment Claims (13:30), Fed Bostic speech (20:30)
Friday – FRA Prelim CPI (07:45), UK Mortgage Approvals (09:30), Eurozone CPI Flash Estimate exp 2.2% (10:00), US Core PCE Price Index (13:30)
So, after a massive week of USD movement, sterling came out as the biggest beneficiary. Andrew Bailey’s stance on (seemingly) looking to hold interest rates in the UK for the next meeting at least, has supported GBP. The main outlook this week will be how markets digest Powell’s Friday comments. Are we in for a big US rate cut in September, remains a poignant question.
In the UK, Sir Keir Starmer will hope the headline of the Oasis reunion will allow his own speech about the state of public finances to sneak slightly under the radar. Tax hikes could well be viewed as something which will hinder UK growth ongoing.
In terms of data, the latest Eurozone CPI inflation flash estimate will come later in the week. This is projected to show a drop to 2.2%, back close to the ECB’s target. Such a move would likely enhance the chances of an ECB rate cut in September.
For the US, the second half of the week brings speeches and data. Two of the most vocal policymakers in Christopher Waller & Raphael Bostic, both speak on Wednesday and are likely to give their own thoughts on the September Fed meeting. This will be followed by two significant releases in the Preliminary GDP reading and Core PCE Price Index. These too will be important towards that meeting.
With such volatility of late, please ensure to get in touch with the team for any pending requirements you may have. Price swings are likely to continue, but we can help to protect your transfers if required.
Have a great week.
