26 April 2024: Consumer Confidence set to fall

MPC members continue to “hedge their recent bets” concerning the first cut in the base interest rate. Market participants had “pencilled in” the meeting in June as when a twenty-five-basis point cut would be agreed.

There are two reasons for this: first, there is an alignment amongst members of the Committee, where eight of the nine members voted for rates to remain unchanged at their latest meeting, with the ninth, Swati Dhingra voting for a cut, and the second, the fact that the meeting is not scheduled to take place until June 20th, which means that the majority of the economic data for the month will have been published.

Furthermore, Andrew Bailey comments that, unlike the ECB, the Bank of England is not tied to the headline rate of inflation reaching its 2% target before beginning to cut rates.

It is the caveat that inflation must be on a definite path towards the target, which provides some wiggle room.

Interestingly, a member of the MPC from each “side” made remarkably similar comments this week about their voting intentions.

Jonathan Haskell, an “independent” member of the rate-setting group, and David Ramsden, the Bank’s Deputy Governor for Markets and Payments are both of the opinion that inflation will fall to 2% in the “coming months”, but both believe that there is still “some way to go” before they will be confident that the fall will be sustainable.

Huw Pill, the Bank’s Chief Economist also spoke this week of his view that a premature cut may be more damaging than waiting until the opportune moment.

This grounds his cautious approach to policy, despite signs of a reduction in inflation pressures.

There is no question that the current rate of deflation has been disappointingly slow, falling from 3.5% in February to 3.2% in April. The core rate has fallen at a snail’s pace and remains above 4%.

Next week. There is no Tier One data due for release, so outside influences will drive the pound. Any further flare-up in the Middle East or disruption to shipping in the Gulf of Aden will lead to a bout of weakness, as will any perceived hawkishness from the FOMC, which meets on Wednesday.

Versus the Euro, the pound has recovered from its recent fall, when it reached a low of 1.1567 on consecutive days last week. It has reached a high of 1.1667 as the ECB still appears to be on a path to curing rates on June 6th.

Yesterday, the pound climbed to a high of 1.2526 versus the dollar, closing at 1.2513.

Citibank is the latest Wall Street bank to make its views on the state of the economy public.

Its Chief Economist spoke of his view that the current level of job growth that has seen more than 800k new jobs created in the first three months of the year is not sustainable and a slowdown may be “in the works.”

The first cut in short-term interest rates is still expected to be in September, although a “pre-emptive” cut could be seen in June if the employment figures for April and May see a significant slowdown.

The question of a soft landing for the U.S. economy has been off the market’s radar for the past month or so, as the Fed has pivoted between three cuts in rates being made this year and the date when the first cut will occur.

As several members of the FOMC have openly questioned if three cuts will be possible, the question of a soft landing is being asked.

Andrew Hollenhorst, challenged the idea of a soft landing yesterday, claiming that he feels there may be “no landing” By that he means that inflation may not fall to the Fed’s 2% target.

Should the headline rate of inflation fall to 2% and the rate of growth is at its current level, a soft landing will be declared.

However, Hollenhorst and others see that as being unachievable, particularly since the Fed has never cut rates when the economy is exhibiting such robust growth.

If a cut in rates takes place in June, the inflation is expected to remain in a 2.5% to 3% range for the rest of the year.

With oil prices “ticking up” due to the continued disruption of shipping in and around the Gulf of Aden and the tensions between Israel and Iran still creating anxiety in financial markets, the Fed is unlikely to agree to a cut within that window of opportunity.

It is well known that Jerome Powell favours a cautious approach to cutting rates since he feels that once that “genie is out of the bottle,” the Fed will have no option but to follow through with further cuts, since a policy of “one and done” would damage its credibility.

The Dollar is unlikely to move too far out of its current range until there is solid evidence of the Fed’s intentions. This is unlikely to happen before the next FOMC meeting on June 12th. Next week’s publication of employment data for April will skew the risks towards a rate cut since continued strong numbers will see the market expect “business as usual” from the Fed.

The Dollar Index fell to a low of 105.52 yesterday but remains in its weekly range. It closed at 105.57.

French President Emmanuel Macron has stayed off the “wider” Eurozone stage recently as he has been dealing with worker unrest at home and concerns about economic activity.

However, yesterday he ventured out and shared his view that the ECB’s concentration solely on its target for inflation is not only too narrow in the modern world but misses a significant opportunity.

The Mandate of the Central Bank looks to achieve a balance between growth and prices, but Macron feels there is a third leg to this conundrum that needs to be considered.

While it may be considered a concession to the French Green Party which has been supporting Macron to hold off the right-wing advance, he is calling for greater consideration to be given to “green” policies.

He criticized the fact that there is no “official” target, for economic growth, but reserved his most cutting censure for the fact that the European Union is avoiding any discussion of decarbonization targets.

Although he can accept that the region has been suffering significant turmoil from geopolitical issues, there is no avoiding the levels of greenhouse gases that continue to cause global warming that can be seen in almost every weather bulletin.

However, any formal changes to broaden the ECB’s mandate are likely to meet stiff resistance from other Eurozone members, including Germany, where the targeting of price stability is of paramount importance.

The ECB’s expected rate cut due to take place on June 6th, will “grapple” for importance with the European Parliament elections scheduled to commence on that day and continue over the weekend of June 8th/9th.

France has a security concern over its staging of the 2024 Summer Olympics. Macron will also be concerned about any disruption to the ceremony to celebrate the 80th anniversary of D-Day.

The Parliamentary election will coincide with the end of Ursula von der Leyen’s first term as President of the European Commission. She has not been the positive influence that Angela Merkel had expected when she championed her candidacy and she is now threatened with being the first President not to serve two terms.

Mario Draghi, whose popularity across the entire Union has barely faded since he stepped down as President of the ECB, is being considered as an alternative candidate.

Germany raised its estimate for 2024 GDP yesterday, and the only real positive is that it does not see a recession. The economy is expected to grow by 0.3% this year, up from 0.2%. Gone are the heady days when Germany was at the forefront of G7 growth tables.

It now faces severe challenges as it tries to develop a services-based economy and move away from energy-hungry heavy industry.

The Euro is still driven by G7 monetary policy expectations. Yesterday, it rallied to a high of 1.0740, closing at 1.0729.

Have a great day!