3 April 2024: Manufacturing at 20 months high
UK manufacturing PMI hit another low


  • Manufacturing output is recovering
  • Job openings are still plentiful
  • The ECB is gearing up for a June rate cut
GBP – Market Commentary

The rise in the minimum wage may turn inflation “sticky”

Rishi Sunak’s recent claims that the economy “turned a corner” at the beginning of the year and has more recently shown signs of a significant improvement have been dismissed as little more than electioneering.

However, upon closer inspection, several emerging factors should lead to a rise in living standards, which are at their lowest level since World War Two, and a fall in the cost of living.

The beginning of the new quarter saw the state pension increase by 10% and several benefits. This may well cause the Bank of England to wince, as it may cause core inflation to rise due to increased demand. Furthermore, the average annual cost of energy fell by close to £250 in the latest period.

The economy is experiencing its first period of expansion of manufacturing output since before the COVID-19 pandemic. The S&P Purchasing Managers index came in a 50.3 with anything above 50 indicating expansion.

This may be just a “flash in the pan”, but anecdotal evidence from factory owners shows that it may be the beginning of a more robust period for the economy. Forward indicators are predicting a healthy increase in activity and output.

However, the disruption to supply chains caused by rebel attacks on shipping in the Gulf of Aden is a cause for concern.

The entire situation in the region has seen two significant escalations in the past few days, with an Israeli airstrike destroying the Iranian Consulate building in Damascus, and several aid workers killed in a strike on an aid convoy in Gaza.

The manufacturing sector of the economy still shed jobs in the latest quarter, but the rate of fall in employment has slowed to its lowest level since May last year.

There is still some contraction being seen in export orders and while it may be glib to put this down to the continuing effect of Brexit, it is a fact that the entire area of the economy is suffering due to the lack of progress made so far in agreeing trading agreements with several nations that were expected to “take up the slack”.

A rate cut in June is still the most likely action for the Bank of England. Provided the latest data does not hold any shocks regarding wage growth or headline inflation, according to Andrew Bailey, a rate cut is very much “on the cards”.

Yesterday, the pound recovered part of its losses on Monday in thin trading conditions. As the market returned from the Easter holiday, Sterling rallied to a high of 1.2578 and closed very close to that level.

USD – Market Commentary

Doves are concerned about the labour market, while hawks are worried about inflation

While it had been little more than a pipe dream, the chances of a cut in the fed funds rate in June appear to have been doused completely following the latest economic data.

The most recent data shows job openings are still above pre-pandemic levels. While this points to job creation staying “healthy” there is little correlation between yesterday’s data and the headline new jobs created section of the employment report.

Nonetheless, there were further signs of a robust economy as factor orders remained in an expansive phase, swollen by a significant rise in orders for durable goods.

Durable items often involve the purchase of capital goods and depict an increase in business investment. Manufacturing output is also expanding, with yesterday’s data showing that factory orders grew by 1.4% after a fall of 3.8% in January.

Several members of the FOMC spoke yesterday, and it was clear that there is a growing consensus between them about monetary policy.

Mary Daly from the San Francisco Fed, and Loretta Mester from Cleveland joined with Fed Governor, Christopher Waller in commenting that although the Fed has indicated that there will be three rate cuts this year, it is not a guarantee or a promise.

Daly went on to say, “There is a path where interest rates start to adjust this year, we’re just not there yet,” Daly said. “If we lock inflation in at this level, it’s a toxic tax on everyone.”

Inflation has continued to fall even after the FOMC paused and then ended its tightening of monetary policy last year, but its progress has slowed considerably, while the areas of the economy that most interest the Fed have continued to grow at a healthy rate.

Both Fed Presidents believe that there won’t be enough data released by the next FOMC meeting on May 1st to decide on a cut.

The dollar index lost a little ground following its “spike” to a fresh high for the year on Monday. It fell to a low of 104.68 and closed at 104.76

EUR – Market Commentary

Holzmann believes that the ECB could cut before the Fed

A June rate cut by the ECB is now firmly in the market sights.

Yannis Stournaras, a member of the ECB’s Governing Council and Governor of the Bank of Greece, indicated the most dovish outlook for monetary policy for a considerable time when he commented yesterday that the ECB could cut rates four times this year.

He believes that total cuts of 100 basis points are feasible this year.

In an interview with a Greek newspaper on Sunday, Stournaras commented, “If inflation develops in line with our March forecast and if this trend continues until the end of the year, I believe that this year we will have reductions in key interest rates from the ECB.”

Although Stournaras has been at the dovish end of the “ECB spectrum”, his views mark a watershed in the market’s perception of how many cuts will take place. His views also show how much a cut in rates is needed to lift the economy away from a period of stagnation.

At the other end of the rate “hike spectrum”, sits Martin Holzmann, the most hawkish member of the ECB’s rate-setting committee.

Despite his recent comment that the ECB may only perform a single cut in rates this year, he appeared to change his mind yesterday, saying that the ECB is likely to cut rates before the Fed, due to the contrast in economic activity between the two economies.

He added that “from today’s perspective, I’d say: interest rate cuts are likely to come. When it will depend largely on what wage and price developments look like by June.”

The lower wage settlements in the first quarter are, the more scope the ECB has to cut interest rates.

Overall, inflation in the Eurozone is still a concern, but in its largest economy, prices are decelerating at a significant rate.

In Germany, the headline rate of inflation fell to 2.2% last month, down from 2.5% in February.

If repeated across the board, the ECB will have little incentive to continue to hold rates at their current level, although a lot will depend on the level of Q1 wage settlements.

The euro regained a little composure after its fall on Monday. It regained more than 50% of its losses, reaching a high of 1.0779 and closing at 1.0769.

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.