Rates are Going Higher and Higher
What can one say about the mess the Bank of England finds itself in? Inflation in the UK, as reported last week, despite dipping below 10% for the first time in many months, is still stubbornly high. Not only the headline figure but also the core data and, most worryingly, food prices are rising at nearly 20%. With the FAO reporting that world food prices are dropping by 19%, how is the UK still seeing such rises? There is, without doubt, some profiteering by the supermarkets, but it does seem extraordinary. Retail sales are also running hot, which suggests that the twelve interest-rate rises, so far, by the Bank of England are not biting, and without doubt, further rises are needed.
It should be noted that the high street’s latest figures may have been distorted by the wet weather in March suppressing that month’s data, but they still looked pretty good. However, as pointed out by my friend Michael Brown from Pepperstone, although the amount spent was up by 4.7%, the quantity bought was down by 3.3%! The currency markets are not convinced of the Old Lady’s commitment to fighting inflation, and they pushed sterling to a two-month low against the dollar last week. Once again, its beleaguered governor Andrew Bailey was less than impressive, and he seems determined to make the Bank of England into a laughing stock. Quoting The Times from Saturday, “The morons are no longer in the government but at The Bank of England”. Hopefully, Catherine Mann, one of the only sensible members of the Monetary Policy Committee, will help the Bank of England regain some credibility when she speaks tomorrow.
The euro suffered alongside sterling last week as the dollar continued its recent resurgence. The greenback’s strength was mainly due to an overdue reassessment of the Fed’s likely future policies. I have been saying for some time that the Fed was not going to pivot anytime soon, and the market seems to be switching to this opinion as well. Indeed further rate hikes are now looking increasingly likely. Friday’s US Incomes data showed a rise of 0.4% month-on-month, as expected, with wages and salaries up by 0.5%. However, spending was more robust than forecast, increasing by 0.8% monthly versus the 0.5% that was anticipated, and March was revised higher. The PCE deflator, a key Fed metric, also came in higher at 0.4% rather than the expected 0.3%. Without a doubt, these numbers will embolden hawks in the Fed to keep pushing at what is increasingly an open door to another 25bp rise in rates in June.
This week we will get to see further evidence of how the US economy is doing and whether stagflation is starting to be a threat, as it is in the UK. As always, in the first week of the month, US job market data will dominate traders’ thoughts. Here the consensus is again looking for an easing in the total of non-farm payrolls to 175k, down from 253k last month. Last month was the thirteenth consecutive month that the data beat expectations, a record, and the question is, can it do so again? The unemployment rate is forecast to rise slightly to 3.5%, while average hourly earnings for the month are seen up by 0.3%, from 0.5% last month. Before the Non-Farm, the US Labor department is scheduled to release its job openings data tomorrow and S&P their Purchasing Managers Indexes on Thursday. In the eurozone, we will get a first look at the inflation data for May. While the headline rate is seen dropping from 7% to 6.4% year-on-year, the core rate is only expected to ease slightly. The consensus outlook for the core is a slight drop to 5.5%, which may reduce the pressure on the ECB to raise rates, putting more downward pressure on the euro, which is already trading near three-month lows against the greenback. I have said very little about the US Debt ceiling negotiations, which, as a friend pointed out, seem to have gone on longer than Michelangelo took to paint the Sistine Chapel ceiling! Over the weekend, it appeared that a deal had been agreed, but and it’s a big but, it has to be passed by Congress, and as of now, this looks a dubious prospect. We will, of course, keep an eye on this over the coming days and hope that both sides can accommodate each other.