2 April 2024: Rate cuts may begin this quarter

Despite the view of Catherine Mann, the prospect of a rate cut at the June meeting of the MPC is gaining traction.

Bank of England Governor Andrew Bailey has laid out clear conditions that will need to be in place and commenting that inflation doesn’t need to have reached the Bank’s target of 2% before a cut can take place, has made a June cut far more likely.

Wage increases are one of the most obvious reasons that there may still be inflation “in the system” since they take time to work their way through. For that reason, the MPC will be “keeping an eye” on the employment reports during the next quarter to ensure that as inflation continues to fall, average earnings continue to follow.

The BRC-Nielsen Shop Price Index showed that “shop inflation” continued to fall in March, with both food and non-food products falling, month-on-month by 0.3% and 0.4%, respectively.

Overall, shop price inflation fell below 2% for the first time in more than two years. The Easter Holiday will have proved expensive for consumers, with the significant increases in both sugar and cocoa. Many retailers reduced the size of their products, a less obvious way of increasing prices, but they fooled very few people.

MPC member Jonathan Haskell, who is equally hawkish as Catherine Mann, although just a little less vocal, spoke late last week of his view that interest rates remain a long way off.

He said: “Although the fall in headline inflation is particularly good news, it is not informative about what we care about. What we care about is the persistent and the underlying inflation.”

This led the market to believe that even though Haskell was in the minority, his comments would be listened to by other members of the committee when deciding on a rate cut.

The Prime Minister has continued to “bang the drum” about the coming improvement in the economy. With the start of April, there has been an increase in the minimum wage and rises in several benefits including the state pension. The triple lock means that pensions will rise by 10% this month.

The pound had a quiet week in the lead-up to Easter. It traded in a narrow range, closing at 1.2625

Jerome Powell remains stoic in his refusal to be drawn on when the first cut in interest rates will happen. The market is becoming convinced that the Fed Chairman is speaking genuinely, when he says that the FOMC is in no hurry to cut rates, given the robust state of the economy and the still buoyant state of the jobs market.

This week will see the publication of several data sets that will culminate in the March Employment report. Unless there is a meaningful change in the trend, the first quarter will have seen the economy create more than 600k new jobs.

There have been several naysayers who continue to believe that the economy is headed for a period of stagnation and possibly a recession. One of the main indicators of a downturn, the Index of Leading Indicators, has improved, and there are still concerns that a rate cut will arrive too late for the economy to be “saved.”

The FOMC agrees that until inflation is on a confirmed path lower, there is no need to rush into cutting rates and potentially ruin the work that they have done over the past year.

Although history will be the ultimate judge of the Fed’s performance, the facts speak for themselves. The major elements of the economy are not just in positive territory, but convincingly so.

Fourth quarter GDP was returned to its original level of 3.4%, while employment and economic output remain buoyant.

The data for manufacturing output moved into expansion for the first time in close to two years last month, this ended a sixteen-month run of contraction.

Production snapped back sharply from a month earlier, with a gain of 6.2 points, which was the largest since mid-2020. At 54.6, output growth was the strongest since June 2022.

The early prediction for non-farm payrolls is for 200k new jobs to have been created. This tends to be the market’s “opening bid” and will be adjusted throughout the week as data for job cuts and private sector job creation are published. Wage increases are expected to have slowed to 4.1% from 4.3% and may give a little encouragement to those who see the FOMC cutting rates before September.

Last week, the dollar index continued its recovery. It climbed to a high of 104.72 and closed at 104.49. Yesterday wasn’t a holiday in the U.S. This allowed the index to continue its rally, reaching a high of 105.07 and closing at that level.

The feeling that interest rate cuts will be synchronized across the G7, whether intentionally or not, is gaining momentum. While the “smart money” is betting on the Bank of England and ECB cutting in June, there is a school of thought that the ECB may not be as driven to cut rates following the publication of the Q1 wage data as the market expects it to be.

There has been no advance guidance about how far wage settlements will have had to fall to galvanize the ECB into action, and there is no prediction about whether wages are slowing at all.

The popular view is that the ECB would like to see wages close to the headline level of inflation.

The latest inflation data will be published later this week, and economists believe that the headline rate may show signs of stalling. This could “throw a spanner in the works” for the more hawkish members of the Governing Council. Their recent comments that the ECB is “preparing for a rate cut” could be construed in many ways, depending on the listeners’ belief that a cut is imminent.

The concern over the stagnation spreading within Germany may not be contained within its borders. There is a real possibility that there will be a contagion that will spread first to France and Spain and then throughout Southern Europe.

If the growth of tourism to pre-pandemic levels is stripped out, the Spanish economy is not performing at the level that many believe. France, which has a history of unrest among workers, is in the grip of a revolt by farmers and associated agricultural industries that are concerned about the import into the region of cheap foreign produce.

That dispute has already spread as far as Poland and saw farmers blockade the centre of Brussels while a meeting of EU agricultural ministers was taking place.

The industrial output decline started in Germany and is spreading throughout the European Union as the businesses that feed into German industry see supply chains slow to a trickle.

The euro continued to be supported by hawkish comments from the ECB, but at some point, rates will be cut, and the common currency will lose its remaining plank of support.

Last week it closed below 1.08 for the first time in a month, but while it quickly recovered then, there is no appetite to “bargain hunt” as things stand. The Euro has since fallen to a low of 1.0730 and could easily challenge support at between 1.0660 and 1.0680 this week, depending on the data released in both the U.S. and Eurozone.

Have a great day!