20 June 2024: No rate cut despite inflation fall


  • Inflation returns to 2%
  • Fed trying to “straddle the economy”
  • National debt levels are concerning the ECB
GBP – Market Commentary

Sunak is quick to accept credit

The headline rate of inflation fell to 2% in May, but, as ever, “the devil was in the detail”.

Yes, compared to a year ago price increases have now slowed to 2%, but compared to two years ago, food prices are still 25% higher overall. While overall this was encouraging news, it doesn’t mean that the Bank of England will rush into cutting interest rates at today’s meeting of the Monetary Policy Committee.

Services inflation is still around 5.5%, meaning that several everyday items like hairdressers and maintenance services are still having to pass their higher overheads on to their clients.

Suppose the next publication of inflation data continues to see falls in the core numbers, which don’t include more volatile items fuel and energy. In that case, there is a possibility that the MPC may agree to a cut at its August meeting, although the “smart money” is betting on the first cut taking place in September.

The Office for Budget Responsibility has predicted that inflation will begin to pick up after falling throughout the summer as Autumn turns into Winter.

Rishi Sunak was quick to claim responsibility for the fall in inflation, but blamed issues that were outside the control of the Government when prices rose to a high of 11.1% in October 2022 it is hard to justify the Government’s role in the fallback to the Bank of England’s target.

While no cut is being expected at today’s meeting, the focus will shift to Andrew Bailey’s press conference following the announcement. Since he has said that if inflation is “trending lower”, there is no reason to wait until price rises reach 2% before cuts can begin.

He is bound to face questions about having misled the market. In summary, it is undoubtedly good news that inflation is finally falling close to the target, but underlying the data are several pitfalls that the MPC will want to avoid.

The voting is expected to again be 7-2 in favour of no change in interest rates, but another dissenting voice may be added to the list, which currently includes Dave Ramsden and Swati Dhingra.

Electioneering has gone a little flat recently, which suits the Labour Party more than the Conservatives, while the latest opinion poll will make chilling reading for Sunak.

According to YouGov’s latest general election prediction, Keir Starmer continues to be on a record-breaking path. The Labour Party sits at 425 seat wins, up by 125 on their 2019 total, and up three seats since the early days of the campaign.

Meanwhile, those voters who are still concerned about the effect of a Labour Government appear to be favouring the Liberal Democrats, with their projected number of seats rising to 67 which is 20 more than they had in the previous Parliament.

The pound continued to gain ground yesterday but remains well below its high of last week. It rose to a high of 1.2740 and closed at 1.2720.

USD – Market Commentary

The Fed is still aiming for a soft landing

The 2024 presidential election is only months away, and for millions of Americans, the economy is still front and centre.

According to one June 2024 poll conducted by a public opinion research company, 77% of voters consider the economy to be a “very important” factor in deciding who to support on Election Day.

Latest polling figures put President Joe Biden and former President Donald Trump neck and neck at 44%.

Consumers have been saying they’re exhausted by higher prices for some time. Fed Officials are well aware of the public’s dislike of inflation, now shoppers are cutting back their spending more materially, as shown in this week’s retail sales data.

The question for markets is whether this is a welcome pullback that allows the US economy to cool just enough to tame inflation or a more malignant trend that hints at deeper weakness.

Fiscal policy which Federal taxation, and spending on larger infrastructure projects as well as Government borrowing is the responsibility of the Treasury. While this feeds into growth, it is the role of the Federal Reserve to use monetary policy to control inflation and boost job creation.

The level of Government borrowing has spiralled, which has led to questions being asked about the Biden Administration’s ability to rein it in, or if they even have the will to do so.

Meanwhile, the Fed sits astride the need for price stability which means using monetary policy to control inflation, while also having a mandate to promote job growth which needs monetary policy to be focussed on the opposite direction.

It is remarkable when interest rates have been held at levels not seen since 2007, that job creation has remained so strong. There were several stories last Autumn that the headline number of jobs created would fall to double digits at best while some predicted that it would become negative, forcing the Fed to cut interest rates.

So far in 2024, employment has not been an issue, but the pace of deflation has slowed almost to a standstill. There has been mention of the next move in monetary policy being a hike, but Fed officials have spoken often of the need for patience, with a cut delayed until December, although a September cut is not “off the table”.

The dollar again trod water yesterday as U.S. financial markets were closed for the Juneteenth commemorations. It fell marginally to a low of 105.15 and closed at 105.24.

EUR – Market Commentary

Bond spreads are beginning to widen

Concern is growing at the ECB about the state of several Eurozone members’ borrowings. It was confirmed that eight member states face sanctions due to their overstepping regulations about budget deficits and debt-to-GDP ratios.

What is currently a concern in Frankfurt could easily develop into a full-blown crisis to rival 2008.

The eight nations have not been named, but Poland and Italy have “held their hands up” as being guilty parties and France may well be a third, while the rest are expected to include Spain and Portugal. Europe’s new budget rules can work only if Brussels can stretch them.

Eleven countries have deficits above 3% of GDP, the official high watermark for debt.

But not all of them will end up being sanctioned. The regulations include ample wiggle room, allowing countries plenty of time to adjust. That’s good news for a block that needs growth more than guardrails.

It may not be enough for states to express “mea culpa” for breaking the fiscal rules but need to show some commitment to cut borrowing.

It does seem that the Eurozone has become a lot like “herding cats” as its members either have ready-made excuses for transgressions or cite specific generational national issues for the need to borrow.

The European Union is still in its infancy, with several key areas of development in the planning stage, the most important of which is a fiscal union to equalize taxation and public spending.

To keep up with the United States and other global competitors, the 27-country Union. It must grow faster than the anaemic 1.4% annual expansion the bloc has averaged since 2007.

Geopolitical issues mean that it needs to increase defence spending, an issue that will lead to conflict with the U.S., particularly if Trump is successful in November.

A commitment to growing the “green” economy is also on Brussels’ to-do list.

Most nations, but especially those in the south, are facing the issue of ageing populations which also places a burden on fiscal policy.

The Euro maintained its recent run of higher closes yesterday. It reached a high of 1.0753 and closed at 1.0742.

Have a great day!

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Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.