A Week That Contains Multitudes
The month ended last Friday with sterling continuing its good run gaining for the ninth week running, settling above the 1.25 level. With the UK economy strike-ridden and struggling, the quid’s performance is certainly a surprise and, to be honest, is down to dollar weakness more than anything else. With Thursday’s US GDP slowing more than expected, although, on close examination of the figures, there were extenuating circumstances, traders took this as reason enough to sell the greenback. Thursday’s bubbly PCE of 4.9% and Friday’s Personal Consumption data confirmed that core inflation is still sticky. The Fed now faces a tricky decision whether to carry on hiking, which we think they will do or to pause and take stock. With money supply, a key indicator of the economy’s health, slowing at its fastest rate since records began in 1959, it looks like we are heading for a recession in the States. However, employment data is still holding up, which we feel just tips the balance in favour of another increase.
Whether the Fed raises by 25bp, we will have to wait and see on Wednesday evening, but it does feel that the market has decided that if it does hike, it will be the last move upwards before rates are cut towards the end of the year. The markets’ views are still optimistic, and we feel the Fed may look at further rises after this month’s and keep to its mantra of higher for longer. Jay Powell’s press conference after the FOMC meeting on Wednesday should reveal a little more about their intentions. The dollar also has the fragility of its banking sector and the ongoing debt ceiling discussions weighing on it. The current buzzword of “de-dollarisation” seems to be gathering fans, no doubt helped by the usual suspects that ideologically oppose the US. Wherever it comes from, it does seem to be adding to the general feeling of greenback negativity, not helped by the ongoing fragility of its banking community.
Despite London and most of Europe being shut yesterday, our hard-working cousins across the pond published ISM’s business surveys, which were pretty healthy. Apart from the Fed announcing its next policy move tomorrow, we also get a plethora of data from the US this week. Friday’s April jobs report will most likely grab the most attention. After last month’s surprise, it really is a difficult number to call. The market is looking around the 185,000 level, but with business optimism drying up, there might be an unpleasant surprise.
The euro has also been a beneficiary of the general demise of the buck and, similar to the pound, has been making regular weekly gains for the last couple of months and is hovering around the 1.10 level, having made a new high last Wednesday. Friday’s German, French and Spanish CPIs (roughly 60% of the eurozone) showed a mixed picture, with the French number accelerating whilst Spain and Germany seem to have topped out, with the core remaining troublesome. Also published last Friday was Germany’s GDP, which showed that their economy stagnated in the first quarter, which may just add grist to the dove’s case for a smaller rise than predicted. Perhaps the ECB’s path will become more apparent later this morning after the eurozone data dump, including the bloc’s inflation level. The gut feeling is that the doves on the council will win out, and a compromise of 25bp will be the decision. However, if this morning’s inflation number is stubbornly high, we will be back with the hawks looking for 50bp.
With the Bank of England out of step with the Fed and the ECB and not meeting till next week, attention will be firmly focused away from this beautiful isle, although we may suffer from financial storms created by the other central banks. There is a pretty clear data docket up till Thursday when S&Ps Purchasing Manager’s Indexes are released, which in all honesty, will be overshadowed by the ECB meeting and subsequent announcements. It is, of course, always foolhardy to ignore UK politics, even though we haven’t changed Prime Minister for at least six months! This week there are local elections across much of the country which political pundits will read much into. It is worth remembering that local elections are what they say they are, and people often vote differently to a general election as they feel more connected to local issues. Whatever the importance, it will be interesting to see whether Rishi Sunak does as badly as he is expected to do. Finally, before his coronation next Saturday, we wish King Charles III a long and joyous reign and a wonderful celebratory weekend to our readers!