7 June 2024: Services output is growing at a reasonable rate

7 June 2024: Services output is growing at a reasonable rate


  • The British economy is set to grow faster than expected – Chamber of Commerce
  • The U.S. economy is nowhere near recession
  • ECB cuts interest rates by twenty-five basis points
GBP – Market Commentary

There is no pressure on the BoE to follow the ECB

On July 4th, the electorate has been invited to vote in an election that is shaping up to be the most policy-less, personality-less election in living memory.

Following Rishi Sunak’s failed gamble in the Leader’s Debate when he blatantly lied about Labour’s spending plans costing the average working family an extra two thousand pounds, has allowed Keir Starmer to retreat further into his shell and avoid providing any policy statements for fear of making a gaffe.

This election is being labelled one for change. Voters are desperate for change, yet it has become about “anyone but the Tories.”

The country deserves better after fourteen years of austerity and mismanagement. Still, only Nigel Farage, delighting in the role of Pantomime Villain which he has taken over from Boris Johnson, has put forward anything approaching radical.

Farage will always be considered a racist, and it is unlikely that he will be able to “shed his skin” as he endeavours to enter mainstream politics and possibly win a seat in Parliament.

The main Parties’ representatives on BBC’s Question Time were to either support or condemn Sunak that the electorate was none the wiser about their plans and would have had their fears confirmed.

The two main Parties have a total stranglehold on the Parliamentary process now that even if the Labour Party serves two terms or three terms following the General Election, they will doubtless be replaced by some form of Conservative rule.

Sunak is characterizing the Conservatives’ campaign by making serious errors of judgment. Even before his desperate gamble on Tuesday evening, it is becoming ever more apparent that he should have waited until the Autumn to call the election.

The UK Chambers of Commerce is one of several organizations that see the economy improving at a faster rate than has been believed recently.

The composite PMI data which includes both manufacturing and services output saw a rise from 52.8 to 53 last month, and the employment market remains relatively buoyant. Despite the rhetoric around the election, Andrew Bailey may well have engineered a soft landing for the economy, although the “window of opportunity” will close rapidly after the Summer.

The expected market volatility following the ECB’s rate cut failed to materialize. Sterling managed a moderate rise to the top of its recent range, but legacy sell orders drove it back to close barely changed on the day at 1.2790.

USD – Market Commentary

What would it take to encourage a July rate cut?

Later today, the U.S. Bureau of Labor Statistics will publish the latest data for the employment market.

The headline figure for new jobs created is expected to come in at about 185k, a moderate rise over last month. While that is the average view of the market, the actual number could be as high as 250k or as low as 125k.

The non-farm payroll data is notoriously difficult to predict since it contains data that is not readily available, and several estimates are within the body of the report that are revised the following month.

The data will encapsulate the inflation outlook for the next month since the number of jobs created and the level of wage increases are a direct component of price data.

The level of wage increases is easier to forecast than the number of new jobs created. It is predicted that wage increases will remain unchanged at 3.9%. This will provide the FOMC with the simple task of leaving interest rates unchanged when it meets next week.

Several FOMC members have gone on record as saying that they believe that patience is needed for the inflation rate to begin to fall again, but there is a view in the market that the country may have entered a new paradigm where inflation doesn’t fall much further and the Fed will indeed to reconsider its target for price increases.

As services output grows at the expense of manufacturing and industrial output, the consequent rise in productivity may well keep inflation at between 2.5% and 3%.

Data published yesterday showed that productivity is at its highest level for three years.

As Nvidia, the leading software company in the Artificial Intelligence Space, sees its market valuation top three trillion dollars driving the Dow Jones Index to fresh all-time highs, there is no sign of the recession that was predicted for the second half of the year.

There is concern that most of the market’s value is concentrated in one sector, but this is not a new phenomenon. As the economy has welcomed new products and inventions, stretching back to the production of motor vehicles, similar concerns have been raised.

The dollar index remains subdued despite the rate cut delivered by the ECB yesterday. It fell to a low of 104.05 and closed at 105.12, as Christine Lagarde confirmed that the fight against inflation continues. This was viewed as a statement that it may be a few months before any further monetary policy action takes place.

EUR – Market Commentary

It will be 2025 before inflation reaches the ECB’s target

The speech that Christine Lagarde delivered following yesterday’s historic announcement of a twenty-five-basis point cut in the level of official interest rates soothed the concerns of several hawks on the ECB’s Governing Council.

She told reporters that the fight against inflation is far from over, the headline rate of inflation is unlikely to reach the Bank’s target of 2% before 2025. The ECB President refused to say that the eurozone has entered a period when it is “dialling back” interest rates.

She told a press conference in Frankfurt: “Are we today moving into a dialling back phase? I wouldn’t volunteer that because, as I said, we are making decisions based on the confidence we have that we are on a path.”

The twenty-five-point cut in interest rates is unlikely to be followed by other G7 Central Banks until well after the Summer. Although the market barely reacted to the rate cut announcement it is now more expensive to hold long euro positions than it had been, this will likely cap the single currency well below its medium-term level of resistance which currently sits at 1.11.

It was interesting to note that on the day that the ECB cut interest rates, it also raised its inflation forecast. This may lead the market to feel that the Bank had “painted itself into a corner,” and the cut could easily be reversed if inflation continues to rise.

Data for employment and Q1 GDP are due to be published later this morning. GDP is likely to be unchanged from its previous estimate, rising by 0.3% between January and March, while employment remains close to record highs.

The first Governing Council to speak following the rate cut will be Arch Hawk, Isabel Schnabel. She will be expected to welcome the cut but emphasize that no cut in July should be expected since the data is not currently considered favourable.

The Euro barely registered the cut in interest rates. It rallied to a high of 1.0902 and closed at 1.0897.

The market will now re-enter a phase where the dollar and FOMC actions dominate. Following today’s publication of the May Employment Report, its focus will change to next week’s FOMC meeting. Although no change to monetary policy is expected, the statement following the meeting delivered by Jerome Powell will be picked over for signs of any change in attitude to a rate cut before September.

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.