15 August 2024: A rate cut is on a knife edge again

The inflation rate rose marginally in July as the fall rate of energy prices moderated.

Without knowing the tone of the conversation at the last Monetary Policy Committee meeting, it is impossible to say where the rise from 2% to 2.2% is sufficient to change any members of the Committee’s minds.

With the vote to cut rates at the last meeting being agreed by the smallest possible margin of 5-4, it is hard to predict the outcome of the next meeting.

Looking at the economy as a whole and disregarding the jump in inflation, the committee can afford to delay the next cut for a month or two.

With inflation still exerting a degree of control over household budgets, the news of an increase will have been further unwelcome news for those with mortgages, particularly those with a fixed-rate mortgage that is coming up for renewal.

Although banks and other mortgage providers have cut rates a little in the wake of last month’s rate cut, and the competition for business between lenders, to see a significant fall in mortgage rates there needs to be a “run” of cuts lasting well into the new year.

It is commonly believed that the three major G7 Central Banks will cut by between 100 and 150 basis points between September and the end of next year with the increments unclear for now since both the Fed and Bank of England are still seeing growth, although that growth is hedging in opposite directions.

The ECB faces the most pressing need for looser monetary policy since its economy is teetering on the brink of recession.

The final four months of the year will likely see raised volatility in financial markets since although inflation has fallen globally, growth is set to become a major consideration.

The pound was unable to hold onto gains it made the previous day as the inflation data did not provide a positive indication of the Bank of England’s intentions.

It fell to a low of 1.2819 and closed at 1.2828 as traders were reluctant to add to long positions and took profits on existing positions.

The prominent Wall Street Investment Bank, Goldman Sachs, has become the first to declare its prediction for the result of the Presidential Election, and surprisingly it has backed Kamala Harris to become the first female President in November.

According to Goldman Sachs, the vice president’s rise in the polls has contributed to a growing likelihood of a “blue wave,” with Democrats potentially sweeping the White House and Congress in the upcoming election.

Her national polling numbers have improved by about three percentage points since Joe Biden declared that he would not be running in November and Harris became the presumptive candidate.

She has also seen gains in key battleground states like Pennsylvania, where Trump currently holds a razor-thin 0.2 percentage point lead over her. To secure the presidency, Harris needs to win at least 270 electoral votes.

There is still a long way to go in the campaign with Donald Trump yet to seriously change his campaign message since he will be challenging a far younger opponent and the mantle of “old man” has been passed to him.

The July inflation data, which was published yesterday, saw something of a milestone. It marked the first time since 2021 that inflation has fallen below 3%.

While Fed President, Jerome Powell, clings to his demand that the rate of price increases still needs to be driven to his 2% target, the data shows real progress.

Although the market is still in “summer mode” which is likely to remain until the Labor Day holiday at the end of the month, it is still driven by the prospect of a loosening of monetary policy, while disregarding growth prospects, other than being a driver for rate cuts.

The dollar is suffering from a renewed belief that it is doubtful that there will be a significant divergence in interest rates between the United States and the Eurozone.

The recent fall in the value of the dollar reflects this. Yesterday, the dollar index fell to match its lowest level this year at 102.27 but recovered well as there was an element of “bargain hunting” which saw it rally to close at 102.61.

Recent inflation data will certainly assess the sensitivity of the ECB’s Governing Council to a fall in the level of deflation.

Just as in the UK, a slowing of the rate of fall in energy prices saw inflation in the Eurozone as a whole rise from 2.5% to 2.7%. Just as in other economies, this was expected.

However, no other G7 member has such a hawkish attitude to inflation as the Eurozone, and while it was widely expected that the ECB would agree to a further rate cut next month that expectation has been dented.

The second estimate for the quarter-on-quarter Eurozone gross domestic product (GDP) growth rate for the second quarter of 2024 has been released, coming in at 0.3%. The figure was the same as the previous quarter, as well as in line with forecasts.

France grew at 0.3% this quarter, the same as the previous quarter. Although the country could potentially see an economic boost from the Olympics in the third quarter of the year, this is likely to be capped somewhat by ongoing political uncertainty. Germany has seen its gains from Euro24 eaten up by a decline in both manufacturing and services output.

The Spanish economy is still the “star of the show” gaining 0.8% in Q2 while both Belgium and Italy saw a marginal fall, both slipped by 0.5% quarter on quarter.

Germany is still the “bête noir” of the Eurozone economy, despite its economy weakening by just 0.1% in the period between April and June.

In Olympic parlance, Germany has slipped back into the pack, having been way out in front for a considerable time.

The outlook for monetary policy in the Eurozone perfectly illustrates the market’s current obsession with monetary policy. Despite the obvious need for a rate cut to stimulate its economy, the ECB is likely to hold steady again in September, while a rate cut in the U.S. has become more likely.

This has seen the Euro rally to its highest level this year, although this may also be driven by the present lack of liquidity and Central Bankers’ comments, which have led to assumptions being made about the path of monetary policy.

The single currency rallied to a high of 1.1047 as sell orders between 1.1020 and 1.1040 were withdrawn to allow it to find a “natural top”. It ran out of steam around 1.1040 in any event and fell back to close at 1.1012.

Have a great day!