ACM Update 30-10-23
The European Central Bank have now joined the “pause” brigade, holding interest rates in their most recent meeting. With inflation slowly falling in the bloc and the economic outlook remaining uncertain, this seemed like the only real option for Lagarde and Co last week.
Elsewhere, the US economy grew at its fastest rate in nearly two years, as consumer spending remains strong despite the higher interest rate levels. No “Halloween horrors” still from the US economy. A further pause from the Federal Reserve seems likely in their Wednesday night meeting, with the Bank of England likely to follow suit on Thursday.
The European Central Bank was the main policy event last week, as Christine Lagarde and Co unveiled their latest stance. Following ten interest rate hikes in a row, the decision was taken to opt for a pause this time, citing data “broadly confirming” the committee’s previous assessment of the inflation outlook.
President Lagarde in her subsequent press conference stated the bank now believe their “policy is at a level that, maintained for a sufficiently long duration, will make a substantial contribution to our goal” (of bringing inflation down).
Once again, her comments are in line with narrative from the Federal Reserve and Bank of England in recent months, of interest rates remaining higher for longer. The BoE’s Chief Economist, Huw Pill, stated recently he expects the bank’s interest rate hiking cycle to be “more Table Mountain than the Matterhorn”. Essentially confirming rates have gone up and will remain at this level for some time before falling, rather than a sharp rise and equivalent fall. Admittedly, a description he took from Bloomberg TV, but a nice analogy, nonetheless.
In other Eurozone releases, the latest PMI numbers were what should be considered “OK” for the bloc last month. Most countries still produced figures of sub-50 (contraction) in the Manufacturing and Services sector. German numbers still seem to be slowly recovering, but how the EU’s biggest player will perform if there is a harsh winter could be pivotal.
The overall Eurozone (for the bloc as a whole) PMI’s for Manufacturing and Services were both well into contraction, causing the Euro to weaken by about 0.25% on Tuesday morning. The week closed out with the Euro Summit in Brussels, bringing together financial leaders from across the union.
Overall, a very flat week for GBP versus the Euro with a total range of 0.6% across the entire week. The status quo remains for now. Movements can be seen in the chart below:
In the US meanwhile, the word stagflation seems to have been well and truly hit out the park. The latest figures from an incredibly buoyant US economy emerged last week, showing the Advanced GDP figure for the US economy in the third quarter. Following on from a pretty positive quarter-on-quarter growth of 2.1% from Q1 to Q2 previously, Q3 was already forecast to be running hot at 4.5%. However, increased spending on events and holidays over the summer caused a spike to 4.9%.
This somewhat laughs in the face of previous predictions of a US recession. A recent JP Morgan webinar I attended last week highlighted the main reason the US housing market hasn’t been as badly impacted by higher interest rates as others. This seems primarily down to the much higher percentage of longer term fixed mortgages in the US, when compared to an abundance of shorter 2-5 year fixes in the UK for example.
There are concerns from some economists though, that Americans are spending the last portion of their “pandemic savings” thus potentially leading to a slow in growth in the final quarter. For now though, the jobs market, retail spending and overall economic performance figures remain buoyant. “Bidenomics” as he calls it, seems to be working.
To support this further, Unemployment Claims data (the number of people newly claiming unemployment benefits) remained stable again the previous week, as it has done for some time now.
The equivalent American PMI figures also demonstrated positivity, with Manufacturing at 50.0 (the best since April) and the Services sector higher still at 50.9. All of this points to the recent Dollar strength continuing. In the last fifteen weeks, the Euro has only managed to gain against the Dollar in two of those, a somewhat staggering statistic.
More volatility for GBP last week versus the Dollar than the Euro definitely, to the tune of circa 1.8% top to bottom. Moves can be seen in the chart below.
In terms of UK data, not masses frankly given the Bank of England meeting coming up this week. The latest Unemployment numbers, delayed from the week before, were released. Overall Unemployment fell back down to 4.2% from 4.3%. On the other side of the coin, the number of those claiming benefits went up by more than expected in September. The latter is probably the more pivotal of the two numbers currently.
The UK PMI numbers meanwhile were better than we have seen recently. Statistics for the Manufacturing sector improved back to 45.2, their best since June. The Services sector meanwhile remains just in contraction at 49.2, but recovering also to its best since July.
All UK eyes this week will be on the Bank of England’s latest committee meeting, taking place on Thursday lunchtime.
Further afield:
The Bank of Canada held interest rates despite persistent inflation. In fact, the Bank’s Governor maintained that inflation is in line with the Bank’s current expectations and that interest rates may already be at their peak.
In Australia, inflation jumped by a lot more than expected in the Q3, moving up from 5.2% to 5.6%. As in many countries of late, this was primarily down to the price of fuel increasing sharply. The chances of another rate hike from the Reserve Bank of Australia on 7th November seem to be rising. The AUD found support of the back of this, appreciating against most other majors.
Just a quick reminder to our clients that this is that odd week in the Autumnal calendar, where the UK and Europe have changed back from daylight saving time, but the US hasn’t yet. So one hour LESS time difference between UK/Europe and the US for this week only. It confuses me every year!
This week:
Monday – Australian Retail Sales (00:30 UK time), Spanish CPI (08:00), UK Mortgage Approvals (09:30)
Tuesday – Bank of Japan Rate Announcement (04:00), German Import Prices & Retail Sales (07:00), Eurozone CPI Flash Estimate (10:00), New Zealand Unemployment Rate (21:45)
Wednesday – FRA/GER/SPA Bank Holiday, Federal Reserve rate announcement (18:00) & Powell speech (18:30)
Thursday – Bank of England rate announcement (12:00) & Bailey speech (12:30), US Unemployment Claims (12:30)
Friday – Bank of England’s Huw Pill speech (12:15), Canada Unemployment data (12:30), US Non-Farm Payrolls (12:30)
A week more loaded than the previous, definitely. The Bank of Japan reveal their latest policy decision on Tuesday 31st. Given their lack of policy changes in recent years, we don’t expect many tricks or treats from the BoJ in their Halloween announcement.
With a bank holiday in many European countries on Wednesday, the Federal Reserve’s latest policy announcement in the US will be the focal point. Powell and colleagues are unlikely to increase their interest rate at this meeting, but there is growing sentiment that one further rate hike will be needed to fully stamp down on inflation. Will this be needed at this meeting, the next meeting in mid-December or drifting into 2024?
The following Powell press conference may give us some clues as to the above. If there is no change in current policy, expect the press conference to be the main market mover come Wednesday evening. As per the time zone differences, the Fed announcement is at 18:00 UK time this week, with the press conference at 18:30.
With the most recent Bank of England announcement on such a knife-edge, this Thursday’s decision becomes less predictable than perhaps it should be. Little seems to have changed in recent UK data, in fact inflation hasn’t changed at all in the last two months. UK growth meanwhile remains weak at best.
In theory, we end up with another pause from the Bank of England and the interest rate remains at the current 5.25%. However, the 5-4 vote last time only needs one committee member to change sides and all of a sudden we have a different decision. We expect rates to be held for now, but the mid-December decision may not be as clear-cut. This all depends on data between now and then though.
To complete the big releases for the week, Friday will see the latest round of Non-Farm Payrolls figures. The notoriously difficult to predict release, saw 336,000 jobs added to the US economy last month versus an expected 171,000. This month’s expected figure of 182,000 is the benchmark, but expect movement circa 12:30pm (UK time) on Friday.
As mentioned already, we have seen some volatility for GBP of late, especially versus the Dollar. Movements of 1.8% in a week may not sound like much, however they make a significant impact when talking six-figure sums for property purchases or business invoices.
Should you have pending payments, ensure to reach out to the team to avoid any Halloween horror-shows this week. We have an assortment of tools to help protect your budgeting and remove volatility from the equation.
Have a great week.
