ACM Update 30-09-24
Sterling continues to trend well off the back of the recent rate hold from the Bank of England. This combined with policy cuts in the US and Europe, supported sterling to multi-year highs versus the Dollar and Euro.
This week sees the latest round of US jobs data, culminating in Non-Farm Payrolls on Friday. Given the significance the Federal Reserve have put on the jobs market in determining ongoing monetary policy, these releases could be pivotal.
Aside from the Manufacturing and Services PMI figures out last week, UK data was very limited. Those two releases weren’t much to shout about either, as the pair fell short of expectations. Both still recorded expansion at 50+ but couldn’t be considered uplifting.
Speaking of which…. after the recent gloom-mongering from the new Government, the Labour Party Conference took place in Liverpool early last week. Sir Keir Starmer and Chancellor Rachel Reeves both seemed to have been given a nudge to provide a slightly more positive outlook, rather than repeatedly telling the country how horrendous the upcoming budget will be.
Starmer declared “light at the end of the tunnel” in his podium speech, whilst Reeves suggested “no return to austerity” in her own. The PM then jetted off to New York, seeking to attract investment from big US financial institutions, to boost the recently flatlining UK economy. He will hope to reverse some of the post-Brexit exodus in the financial services sector.
As mentioned, the Pound pushed up to highs last seen in early 2022 versus both the Euro and US Dollar last week. With recent narrative from the Bank of England Governor, Andrew Bailey, suggesting that interest rates may remain high for some time, we could well see GBP holding on in the short term.
One of his fellow Monetary Policy Committee colleagues, economist Megan Greene, also spoke last week. One of the newer members to the committee, she stated that a cautious approach to rate cuts is required, however lingering cost pressures will be a focal point. All eyes on the next round of UK data for further clues it seems.
Another good few days for GBP versus the Dollar as shown in the chart below, gives us a stable footing going into the new week:
US data meanwhile has been looking pretty good. After a slow Q1 of this year (1.6% growth), the US economy was confirmed as having grown by 3.0% (annualised) in Q2. The uptick was largely due to increased consumer spending, and general increases in investment.
The Federal Reserve will be hoping that they haven’t moved too late to keep that momentum up in Q3. Inflation also seems to be trending the right way, according to the Fed’s favoured metric of Core PCE Inflation, recording 2.2% (YoY) growth in August. This marked the lowest for the figure since early 2021.
Debate continues in the US as to what the remainder of the year will hold in terms of interest rate cuts. Falling US Consumer Confidence figures released last week have led to bets increasing on another 0.5% rate cut from the Fed on 7th November.
Aside from the figures, we heard from a number of Fed policymakers last week:
- Raphael Bostic stated residual concerns on inflation could have led to him voting for a smaller cut 10 days ago, but labor market concerns led to the larger reduction. He expects the Fed to move “aggressively” in getting back to a neutral rate.
- Neel Kashkari sees a slower pace of Fed rate cuts in coming meetings, thus suggesting quarter-point cuts to come.
- Lisa Cook “wholeheartedly supported” the 0.50% cut last week and would inspect upcoming data carefully to consider her next move.
- Michelle Bowman (the sole dissenting member in the last vote) believes inflation still remains “uncomfortably above target”.
- Fed Governor Jerome Powell spoke, but no comments on monetary policy.
In the Eurozone, another pretty dire round of Manufacturing & Services figures landed, all well under expectation. Figures from all of the respective major economies fell short, as well as the Eurozone as a whole.
These are just one factor in increasing expectations that the ECB will reduce interest rates again in October to get the economy growing again. Recent data has pushed the chances of another cut in a couple of weeks to 60%. Consumer confidence figures, released last week, also showed a big drop, amidst the wider slowdown in the bloc.
However, we also saw Spanish CPI drop to 1.5%. Thus, the Eurozone now has a major economy with inflation under target and continent-wide sluggish growth. An October cut seems more and more likely.
On upcoming policy, a couple of ECB members had their own say last week. Klaas Knot expects “gradual rate cuts in the near future” according to a speech. His colleague Isabel Schnabel meanwhile has turned pessimistic, suggesting that the Eurozone economy is “stagnating”. Both of these opinions seem very much viable, however the change in stance of Schnabel was notable.
As we can see below, sterling held relatively flat last week against the Euro, bouncing along either side of 1.20 but a two-plus year high, nonetheless.
The week ahead:
Monday – Canadian Bank Holiday, UK Final GDP (07:00), UK Mortgage Approvals (09:30), Fed Bowman speech (13:50), ECB Lagarde speech (14:00), Fed Powell speech (18:55), BoE Greene speech (21:10)
Tuesday – Eurozone CPI Flash Estimate (10:00), BoE Pill speech (15:00), JOLTS Job Openings (15:00)
Wednesday – ADP Non-Farm Employment Change (13:15), Fed Bowman speech (16:00)
Thursday – SPA/ITA/FRA/GER/EU/UK/US Services PMIs (08:15-15:00), US Unemployment Claims (13:30)
Friday – BoE Pill speech (08:55), US Non-Farm Payrolls (13:30)
Onto the new week then, with just one day of September and indeed Q3 left. In terms of data, Monday is relatively thin on the ground but we have already seen UK GDP released first thing this morning at 0.5% for Q2. This was a fraction under the 0.6% estimate, in not a great sign for economic growth. The signs for the quarter we are about to finish aren’t masses better, with supposedly zero growth for the last two months. Aside from that, releases are relatively light on the UK front for the week ahead, with just a couple of speeches from MPC members Greene and Pill.
For the Eurozone, President Lagarde speaks on Monday ahead of the latest CPI inflation Flash estimate for September. This is projected to show the metric down to 1.9%, which would be in line with the ECB’s own projections. Such a reading would add further weight to a further interest rate cut.
However, the big releases will all be coming from the US. Jobs data always dominates the first week of the month and that will indeed be the case this time around. With the re-alignment of Federal Reserve monetary policy to support the employment market, another weak Non-Farm payrolls reading on Friday lunchtime could well imply a further sizeable US rate cut is around the corner.
The usual buildup starts on Tuesday, with the JOLTS Job openings figures, demonstrating how many jobs are advertised over the last month. This could be a further pivotal week in the short-term fortunes of the US Dollar strength.
Overall, we are still presented with excellent opportunities for buying Euros and USD at the moment. As always, it is tough to say precisely where things will go from here but GBP does seem to be on the front foot…… for now.
For any pending requirements, reach out to the Aston team and we will be happy to assist.
Have a great week.
