The UK energy market has finally delivered on the big hikes from the regulators’ price cap revisions, the commodity markets appear to be stabilising, albeit with prices materially higher than where they were this time last year, and there are further signs of a pick-up in consumer borrowing. On the face of it, last week’s data and surveys weren’t an indication of problems to come. However, dig a little deeper and you’ll find that the figures weren’t as good as they first suggest. Unsecured lending was rising because consumers were paying less off their credit cards, the rise in house prices, recorded by Nationwide Building Society, was at least in part because of a lack of available properties, whilst older, wealthier households disproportionately benefited from the accrual of savings during the pandemic. The revised March reading for the manufacturing Purchase Managers Index (PMI) recorded a further decline in the index versus preliminary and February outturns, and GDP growth was revised up, but on a sharp improvement in the current account balance that, at first glance was difficult to reconcile.

Interest rate expectations went basically nowhere. The markets continue to price in an aggressive series of hikes from the Bank of England (BoE) over coming meetings such that the Bank rate reaches 1.75% at the September meeting. I find such a scenario almost impossible to square with the information received from businesses in a wide variety of economic areas. They tell us that investment plans (capital and labour) are being scaled back, and the approach is to batten down the hatches. Interest rates may well rise far less than markets price for, which could have a very telling effect on the valuation of the GBP, in my opinion.

For this week there is really not much to wait for in terms of data or surveys due for release. I highly doubt that either the construction or services PMI readings for March, the latter a revision, will offer much comfort or insight for the UK’s economic fortunes. Speeches from BoE members Bailey, Cunliffe and Pill are likely to prove of greater interest in my opinion. What will they have to say about the outlook for the economy and the effectiveness of monetary policy adjustments?

In terms of the GBP, last week saw the pound struggle for headway against the USD, and fall again against the EUR. The risks are likely again to the downside for the GBP over the course of this week, in my opinion. Unless there is some sort of breakthrough in peace talks between Russia and Ukraine, some hint at higher UK rates than is already priced for, or there is an emerging problem in other major economies, sustained GBP upside looks unlikely, as far as I’m concerned.

What did we learn from last week’s releases? Actually, not that much. Although there was another solid print in US non-farm payrolls for March, net payrolls up 431,000 after a 750,000 print in February. That still leaves payrolls around 1.5 million lower than pre-pandemic, but there was a sharper-than-forecast rise in average earnings growth and both unemployment and underemployment rates fell, to 3.6% and 6.9% respectively. There is no doubt that the labour market is tight, but considerable doubt as to whether the economy can withstand a prolonged reduction in real wages, which despite the rise in average earnings is what the US is experiencing right now.

Moreover, the Conference Board consumer confidence index dropped again in March, and the Institute for Supply Management (ISM) manufacturing index fell sharply, despite strong rises in the prices paid and employment components. New orders slowed to the smallest rate of expansion since the height of the first wave of the COVID pandemic in May 2020. So all is not as positive as suggested and the Federal Reserve should be mindful of the ongoing trend of reducing mortgage demand and downturn in real personal spending as well. 

For this week, the focus is likely to be on the Federal Open Market Committee (FOMC) meeting minutes and a plethora of speeches from Federal Reserve officials. The speeches from Fed officials may well continue to focus on the improvements in the labour market and overshoot of inflation, but realistically there should be some recognition that the survey data is highlighting concerns regarding order books and activity as well. In this context, the FOMC minutes are therefore less important, looking at what has happened, rather than looking forward.

The USD may gain some additional support this week, but there are serious questions to answer regarding the performance of the US economy and the sustainability of growth in the face of materially tighter monetary policy as well as a sharp squeeze to disposable incomes.

The outlook for the Euroland economy, which was made far more uncertain by the outbreak of the Russian invasion of Ukraine, is little clearer after events of the last week. The conflict now appears to be a war of attrition, with Russian and Ukrainian forces attempting to consolidate positions and mount counter offensives. Meanwhile, Euroland’s economy still remains in the grip of Russian energy imports, and its recovery blighted by the increased cost of materials and renewed surge in COVID infections. 

Was it any wonder then that the manufacturing Purchasing Managers’ Index (PMI) survey for final March was lower than the preliminary reading? In terms of other confidence indicators, the Euroland economic and industrial indices fell by less than expected, whilst the services index unexpectedly rose. Last week though was all about the inflation data for March, released at the end of the week. There had been signals that the headline figure would overshoot expectations considerably, but at 7.5% year-on-year it was still well beyond what had been expected. That combination of higher inflation and weaker activity just makes the European Central Bank’s job harder.

Already this week, the April Sentix Investor Confidence index has recorded another drop, again far larger than market consensus forecasts. The drop, to -18, took the reading back to where it was on the Summer 2020 rally post the first COVID wave, with the deterioration likely to be driven by inflation worries and supply chain issues. In the rest of the week, services PMI revisions for March and German factory orders and industrial production data are all that’s due of note.

For the EUR, we’ve seen further retrenchment from recent gains, with the pick-up in inflation and slowing in activity combining with the growing concerns of a protracted and economically damaging conflict between Ukraine and Russia, which could lead to prolonged or deepening economic sanctions between the West and the East. There is little to offer much support to the EUR for now at least, in my view.

The meetings over last week saw central banks look to take a somewhat different approach to the threats facing them. In particular, the central bank of Chile increased interest rates by 1.5 percentage points to 7%, but the markets had expected more, given the escalating inflation issues, particularly from energy. The Colombian central bank also did less than expected hiking official rates from 4% to 5%, with consensus being for a move to 5.5%. The Czech central bank raised rates from 4.5% to 5%, although concerns around inflation were driven by both input driven influences and currency weakness. Meanwhile, the Bank of Thailand left policy on hold at 0.5%, worrying more about the ongoing economic threats, rather than the surge in inflation. 

For this week, the Reserve Bank of Australia kick things off early on Tuesday morning, although no change is expected. Later that day the central bank of Romania is expected to hike rates by 50 basis points to 3%. The National Bank of Poland is predicted to hike rates by 0.75 percentage points, taking official interest rates to their highest level since December 2012, when they meet on Wednesday. The Peruvian central bank is forecast to hike interest rates from 4% to 4.5% on Thursday, whilst the Reserve Bank of India are set to leave interest rates at 4%. What will be interesting from these meetings is whether any of the central banks that hike interest rates are worried about the negative impact on activity, or if they see the greater threat being the prolonged effects on inflation expectations?

View the previous Quick Take.