ACM Update 28-10-24
A quieter few days in terms of market data meant focus shifted towards upcoming events, namely the UK Budget & US Election. We also have interest rate decisions from both countries in the next fortnight.
For now, Bailey & Co seem split on their stance for ongoing monetary policy. An interesting month to come both politically and economically.
As mentioned above, physical market data releases were somewhat thin on the ground last week. What was released though didn’t paint a spectacular picture for the UK as we move towards the Budget and next interest rate announcement.
The latest government borrowing figures were released on Tuesday morning, showing a sharp rise. These showed the difference between spending and tax income reached £16.6 billion in September. This marked the third-highest September since records began in 1993.
The news comes prior to the aforementioned Budget on 30th October, where Chancellor Reeves is expected to change debt rules, thus giving more room for investment projects. The debate between the previous Government and the current about the inherited £22 billion financial black hole, rumbles on. The UK debt to GDP ratio meanwhile sits at 98.5%, up at levels last seen in the 1960s.
The other main UK economic data release was the Manufacturing & Services PMI data. Both of the figures came in slightly short of what was expected, but importantly both were still demonstrating expansion in their sectors. Admittedly, neither of these caused major movement for the pound.
In positive news, the IMF upgraded its UK growth forecast for the full year. Having estimated 0.7% back in July, it now believes the economy will grow by 1.1% for the full year. A move in the right direction for a Government desperate to generate economic growth.
Aside from that, we saw a number of speeches from Monetary Policy Committee members, which demonstrated that Andrew Bailey and his colleagues have varying stances. The Governor himself already stated in his Guardian article a few weeks ago, that the Bank could become “ a bit more aggressive” in their approach to cutting interest rates, now UK inflation is under the 2% target.
Elsewhere on the committee, newer policymaker Megan Greene stated in an FT column that she favoured a gradual cutting approach. She believes that falling interest rates could encourage consumer spending, thus pushing inflation back up. A gradual approach from her therefore makes sense.
The ever-hawkish Catherine Mann though, still thinks inflation has “a long way to go” before being comfortable. She referenced Services sector inflation as a main area of concern, citing the fact it only came under 5% in August. We can expect Mann to vote for a pause in rates in ten days time.
Currently markets are pricing in an 88% chance (according to Reuters, 25th Oct) of an 0.25% rate cut from the Bank of England in their 7th November meeting. Catherine Mann is likely to be one of probably two voting to hold, of the nine-strong committee. The question remains, what (if any) impact will the 30th October budget have on the spread of votes.
Lingering UK nerves and uncertainty, as well as events in the US (more to follow below), saw GBP-USD move to a two-month low last week. Movements for the pair can be seen here:
Over in the US, as mentioned the Presidential Election between Trump & Harris is just a week away. Naturally this is beginning to impact FX markets and was indeed a Dollar-driver last week. Financial markets seemingly began to adjust to the prospect of a Trump victory, perceiving it to be favourable economically. This comes from his suggestions of increasing tariffs on imports, as well as lowering taxes for Americans.
As from the above chart, this drove Sterling-Dollar to a fresh two month low at around 1.29 before bouncing back up a fraction in the second half of the week.
The Federal Reserve’s Beige Book release took place on Wednesday evening, as usual a fortnight prior to their next policy meeting on 7th November (nudged back a day due to the US election). The report contains the data the committee can use to make their policy decision, and showed little growth across most of the US.
Despite this, expectations are pretty much nailed on for a 0.25% rate cut in the forthcoming meeting. However, this may well play second fiddle in terms of significance to any election-related fallout, being a mere 48 hours after polling day. Donald Trump has threatened to remove Fed Chairman Powell from his post if he is victorious, but this wouldn’t be until the official changeover of power in January anyway, if it does happen.
In terms of data releases, the PMI data for Manufacturing & Services sectors was mixed. The former continues to show signs of a slowdown, whilst the Services sector remains positive. The latter making up the larger share of the economy, provides some reassurance.
Given the significant events to come in the US & UK, Eurozone data is largely playing a supporting role at the moment. Given the next ECB meeting (after two in five weeks) is not until mid-December, we can expect a quieter spell on that front.
ECB chiefs joined forces last week, voicing their concerns over inflation now being too low. The central bank governors of France, Portugal & Finland argued the economy is facing a slowdown as higher interest rates are still restricting economic output. Concerns around the growth outlook now seem to be emerging as the biggest concern on the continent.
President Lagarde meanwhile urged caution in policy decisions. She believes inflation will come back up throughout the rest of the year, but “hoped” inflation would be back consistently at their 2% mandate soon. The ECB’s own prediction is for late 2025 to hit that mark.
Data-wise, Manufacturing & Services PMI figures were also released for the bloc. French figures fell short of expectations, where clearly the Olympics effect has fully disappeared! German figures though painted a better picture on the Services front. Overall, that sector continues to drive the Eurozone figures.
Sterling-Euro movements last week were modest, hovering in a 0.5% range as displayed in the chart below:
The week ahead:
Monday – Daylight Savings Time Change UK & Europe
Tuesday – UK Mortgage Approvals (09:30 UK TIME), JOLTS Job Openings & Conference Board Consumer Confidence (14:00)
Wednesday – UK Budget (approx. 12:00), ADP Non-Farm Employment Change (12:15), US Advance GDP (12:30)
Thursday – BoE Breeden speech (01:35), Bank of Japan rate announcement (03:00), Eurozone CPI Flash Estimate (10:00), US Core PCE Price Index & Unemployment Claims (12:30)
Friday – US Non-Farm Payrolls (12:30)
Just a quick note for our clients not in the UK or Europe, that the clocks go back by an hour this weekend. But that change doesn’t happen in the US until the following weekend, just to confuse matters.
Looking ahead to the next couple of weeks, the UK Budget and the US Election will be dominating headlines. However, the matter of interest rate announcements in both countries shouldn’t be underestimated.
UK news next week will be dominated by Thursday’s budget. After a few months of gloomy language around UK finances, we will get to see what Sir Keir Starmer and Chancellor Rachel Reeves have in terms of economic proposals. Tax hikes seem likely, whilst Starmer has dodged questions recently on National Insurance contributions going up for employers.
The Budget is likely to be unpopular, but that has been the expectation for some time now. Therefore markets have almost certainly priced that in to current figures. Hopefully it isn’t as badly received as “Trussenomics” was during the autumn of 2022, where the Truss-Kwarteng mini-budget wreaked havoc. A Budget the day before Halloween hopefully isn’t an omen.
The following week provides the latest Bank of England rate announcement on Thursday 7th November. As mentioned, a rate cut of 0.25% looks likely here, barring any Budget shenanigans.
Over in the US, Friday being the 1st of November sees the usual run of jobs data coming through. Given the focus on the employment sector from the Federal Reserve, a cooling jobs market could lead to calls for a larger than 0.25% interest rate cut the following week. The Non-Farm Payrolls forecast is currently circa 125,000 jobs added in October, which would be less than half the September figure.
Beyond, the US Election takes centre stage on Tuesday 5th November. Again, perhaps it being Guy Fawkes/fireworks night in the UK seems apt! Dollar activity in the run up to this will be volatile, so make sure to reach out to the team with any specific requirements you have coming up. We can look to protect those for you using differing tools.
In Europe, we are in the midst of a slightly quieter period at the minute, with the next ECB meeting well over a month away. As often in this type of scenario, any hints from ECB members on upcoming policy thoughts will be closely watched.
With a busy period coming up, get in touch with the Aston team for any specific requirements you may have.
Have a great week.
