Sterling pushes higher as the first signs of monetary policy normalisation has begun. BoE member Vlieghe stated that the first rise in the bank’s rate is likely to become more appropriate during the course of next year, with some modest further tightening to follow. He went on to advise that it will probably take until Q1 of 2022 to have a clear view of the post-furlough unemployment and wage dynamics, so a rise in the bank rate could be appropriate soon after. Providing this signal has given the Sterling a lift despite various challenges that it currently faces. Earlier in the week, BoE Governor Bailey acknowledged that the economic recovery in the UK is "quite unbalanced" and "the risk of high inflation expectations becoming entrenched is not our central view". However, there were some concerns that consumer spending could be losing momentum as the CBI retail sales index edged lower. In the meantime, concerns surrounding the Indian variant remain and could potentially hinder the final stage of unlocking on the 21st of June. In Europe, conditions continue to improve as vaccination rates pick up. To put this into perspective, at the beginning of May the EU have vaccinated 24% of the population and by the end of the month, the rate had increased to circa 38%. The German IFO business confidence index strengthened to a 2-year high. The current assessment and expectations index strengthened to levels above forecast. The IFO stated that economic recovery is gathering pace with a
Last week we saw another strong performance from Sterling with economic data strengthening its outlook. The labour market data showed a net decline in jobless claims with the unemployment rate also falling. Retail sales and economic activity data in the form of the purchasing managers’ index (PMI) were optimistic. Retail sale volumes surged by 9.2% compared with the consensus forecasts of 4.5% while the composite PMI for May showed its highest level on record. However, concerns started to emerge surrounding the Indian variant as it was believed it could hinder further relaxation of COVID-19 restrictions. The single currency remained at the forefront as optimism surrounding the EU vaccination programme provided net currency support. This was further supported as ratings agency, Moody’s expressed optimism that the EU recovery fund would support Southern Europe which helped underpin underlying Euro confidence. However, ECB Chief Economist Lane stated that price increases due to bottlenecks is not real inflation. Lane went on to say that the central bank still has a lot to do to create an organic inflationary environment via policy. The US Dollar capped its losses as Federal Reserve Vice Chairman Clarida stated that the central bank must be attuned and responsive to incoming results to guarantee that inflation is transitory before adding that the Federal Reserve would only act if the data threatened to increase inflation expectations. However, the Minutes from May’s Federal Reserve meeting stated that there was still a long way to go to meet the central bank’s goals.
Last week, the main focus was on US data following the disappointing US job figures in the previous week which dampened the longer-term interest outlook. US inflation may have reversed this chain of thought. The US consumer prices rose by 4.2% in April, the most since 2009 and above forecasts, adding concerns to inflationary pressures capping the economy’s longer-term performance which in turn resulted in the 10-year US Treasury yield surging to a two-week high. In addition, according to JOLTS data, there was an increase in job openings to a record high of 8.12 million with underlying confidence in the outlook remaining mixed following last week’s employment report. In the meantime, the Sterling was boosted as the government confirmed that the UK coronavirus alert level had been reduced from four to three due to reduced transmission rates and it also confirmed that the further easing of restrictions would take place this week in England. There are obvious concerns regarding the Indian variant, but the UK intends to speed up the vaccine rollout. The EU Commission increased the Eurozone 2021 GDP growth forecasts from 3.8% to 4.3% and the 2022 outlook was also upgraded. The Commission expects a significant easing of coronavirus restrictions during the second half of the year and the EU also announced that budget rules would be suspended until the end of 2022. The German and Eurozone ZEW sentiment both strengthened which helps reinforce the upgrade in forecasts. Looking to the week ahead, the market will once
While last week was a short one, there was still plenty of items on the docket to analyse. The Bank of England’s quarterly inflation report and interest rate decision was released. The Bank of England held interest rates at 0.1%, in line with expectations. There was no change to the total asset-purchase programme, although chief economist Haldane dissented and called for a cut in purchases. There was a sharp increase to the 2021 GDP growth forecast by 7.25%, although the 2022 outlook was cut slightly which was not a big surprise given the success of the vaccine rollout. A longer-term factor was that unemployment was also downgraded significantly from 6.4% to 5.1% for the end of the year. Governor Bailey expected that higher inflation rates would be transitory, although markets were less convinced. The UK local elections also provided a domestic focus with political uncertainty still fresh in people’s minds. The primary focus was on the Scottish vote with the ongoing debate surrounding a second Scottish referendum. Over the weekend, the results were released with the Conservatives strengthening their grip on power and the Scottish National Party (SNP) failing to obtain a majority. This boosted the Sterling as it pushed the potential for a second Scottish referendum slightly further away. In the meantime, the most eagerly watched figures were from the US employment report. The headline figure turned a few heads with expectations of job creation close to one million given the reopening of the economy in April. The
The main focus last week was the FOMC meeting as the market keeps deliberating the ongoing yield debate. Fed Chair Powell stated that a transitory increase in rates this year would not meet the criteria for raising interest rates and that the economy is a long way from its goals while near-zero interest rates remain appropriate until these targets are met. In addition, Powell has previously laid out that tapering would come before any discussion on shifting rates. Powell added that it is not time to talk about tapering yet and that it is doubtful whether there will be a substantial increase in inflation while slack remains in the labour market. The overall dovish tone sent the US Dollar lower as markets parred expectations for action from the Federal Reserve.In terms of data, economic readings showed two contrasting economies. The US economy expanded by 6.4% on an annualised basis in Q1, propelled by a 10.7% rise in personal consumption. Growth could be even stronger in Q2. In contrast, Eurozone Q1 growth fell by 0.6%, signalling a return to recession as Covid-19 containment measures were extended.Looking to the week ahead the UK’s focus is likely to be twofold. The Bank of England (BoE) policy decision on Thursday takes centre stage for sterling markets, but there will also be attention on Scottish and Welsh parliament and English local elections. Across in the US, the main market focus will be the US labour market report due on Friday. TuesdayUK Mortgage
Eurozone Vaccine Boost but Double Dip Recession Looms as the Market Focuses on this Week’s FOMC Meeting
Last week there was a vast amount of economic data released from the UK but in hindsight, this failed to provide any significant directional change in the value of the sterling. Labour data was positive as the unemployment rate declined from 5.0% to 4.9% with a smaller than expected increase in jobless claims. Retail sales increased 5.4% for March, well above the market expectations of 1.5%, while government borrowing was above forecasts. In the meantime, inflation was just under forecast. The significant hindrance to the Sterling was the risk-off tone following as the WHO stated that new COVID-19 cases are rising in all parts of the world except Europe.In Europe, the ECB made no changes to interest rates following the latest policy meeting, in line with expectation, and in line with consensus forecasts. There were also no changes to the asset-purchase programme with the total envelope for PEPP bond purchases remaining at EUR1850bn which will be maintained until at least March 2022. As announced at the previous meeting, purchases will move at a faster pace this quarter before inevitably slowing down again. There was a degree of cautious optimism in Europe which strengthen the single currency supported by the EU announcement that it had secured a further 100 million doses of the Pfizer vaccine and the Johnson & Johnson’s resumption of the COVID-19 vaccine rollout across Europe. Additionally, economic activity in both the services and manufacturing sector accelerated.It was a quiet week in terms of economic data for the US.
Last week, the UK focus was on the reopening of the hospitality sector and non-essential shops whilst data surrounding economic activity was largely ignored due to the historic nature and lockdown conditions. The market will focus on the money spent now that restrictions have been reduced. In particular, the impact on new COVID-19 cases will be watched with further restrictions easing on the roadmap, but not before 17th May. The Bank of England announced that chief economist Haldane would leave the bank in June. Haldane has talked up the recovery outlook this year and adopted a generally more hawkish stance. His departure could tilt the balance on the committee significantly and lead to a more dovish policy stance over the medium term with increased resistance to higher interest rates. The single currency pushed back towards psychological levels against the US Dollar. This was in large part due to the Italian government who announced a stimulus package worth €40bn which helped underpin Euro sentiment. Data and COVID-19 conditions remain dovish. German Chancellor Merkel stated that infection rates are too high and that the third wave may be the toughest. Delays to the Johnson & Johnson vaccine could be a significant setback given that the EU has placed huge orders for the vaccine. In the meantime, the German ZEW economic confidence index retreated and was below consensus forecasts. The FOMC continues to reaffirm that interest rates will remain at record lows for a sustained period, however, data suggests that the market
Sterling On the Backfoot Whilst the Market Will Continue to Closely Watch Us Data and Central Bank Tone
Last week we saw Sterling under pressure in large due to COVID related matters. There were also fresh reports that the UK would face vaccine supply difficulties over the next few weeks. This in turn could result in the slowing pace of the COVID vaccinations in the UK could ultimately delay the government’s plans to reopen the economy further with the reduction of restrictions in five weeks’ time. In addition, there were some reservations that the UK advantage over the Eurozone was set to narrow over the next few months. However, there was some positive news from the UK economy as the UK PMI construction index strengthened to its strongest reading since September 2014.Oppositely, the single currency strengthened on vaccine hopes. Reports from EU Commission internal documents signal that the EU was on track to vaccinate close to 60% of the total population by the end of June, which would also imply that the EU is likely to exceed the target of 70% vaccination rates by the end of the Summer. The Euro has been trailing large parts of the developed world in terms of vaccine deployment so a pickup could restart a faltering economy.In the meantime, focus in the US remains on bond yields and the path of interest rates. Fed Chair Powell was speaking at the virtual IMF meeting. He stated that monetary and fiscal policy, allied with the vaccination programme, is creating a brighter outlook. He also noted, however, that he wants to see a string of
US Economy Continues to Show Positive Signs as the Market Focuses on Comments from the Central Bank this Week
Last week it was a short one as the UK and Europe celebrated Easter weekend. Much of the focus was on the US labour data which was released on Friday. Following the positive data trend seen from the US Labour Department, non-farm payrolls soared by 916,000 jobs last month, marking up its largest gain since late August, while February data was revised to be higher. Unemployment declined to a 12-month low from 6.2% to 6.0% in line with market expectations. Following this on Monday, the Institute of Supply Management (ISM) services sector index strengthened sharply to a record high of 63.7 for March.Bank of England Monetary Policy Committee (MPC) member Vlieghe advised that rapid growth is required to close the gap compared with the pre-pandemic growth roadmap. He noted that a few quarters of good growth would not imply that the central bank can put on the brakes and tighten policy. He also added that any increase in inflation would not be enough this year to say that the economy does not require monetary support.In Europe, overall confidence in the region remained weak. This was illustrated by reports that Italy was set to cut its GDP forecast for 2021 growth from 6.0%. to 4.1%. This was further compounded when French President Emmanuel Macron announced a nationwide four-week lockdown, an alarming sign that Europe is yet again losing control of the pandemic.Looking to the week ahead, the market will continue to focus on US data following the bullish labour data last
Last week the focus was on the vaccine news story with the EU summit and the ongoing US yield debate. German Chancellor Merkel stated that the country is now in a new pandemic while French President Macron advised new short-term restrictions. EU leaders, in theory, backed the potential to block vaccine exports and Commission President Von der Leyen stated that AstraZeneca must catch up on promised deliveries before exporting doses elsewhere. The EU health director stated that he was optimistic that the EU would hit a 70% vaccination target by late summer, but concerns continued, and the Euro retreated.The Sterling was dented by the potential impact of vaccine disruption because of the ongoing tensions with the EU along with the risk of the move following the Suez Canal crisis. Softer inflation did little to help the currency. Inflation declined from 0.7% to 0.4% for February, well below expectations of 0.8% with core inflation rates at 0.9% from 1.4%. The lower-than-expected inflation rate will dampen any expectations of higher yields and curb currency support. However, the Bank of England Chief Economist Andy Haldane stated the UK economy could see a “rip-roaring” recovery even if consumers spend just a bit of the additional savings they accumulated during the COVID-19 crisis.In the meantime, US Dollar sentiment was mixed following comments from central bankers. Dallas Federal Reserve Bank President Kaplan stated that his base case is that there will be a temporary surge in prices this year while inflation will settle down next year.