On the Spot: Holiday-Shortened Weeks Ahead

May 20, 2024

Market run-through

Not unusually, Europe is out of step with the UK, with much of it shut to celebrate Whit Monday whilst we remain open today but shut next Monday. It is tempting to make puns with a holiday called Whit Monday, but I will avoid the groans and concentrate on more serious matters. The data out of the states last week was, as it has been recently, somewhat mixed, with the PPI numbers a little hotter than expected, whilst the CPI was a little softer. Noticeably, speakers from the Fed came out vociferously against the immediate rate cut mania. Cleveland Fed President Loretta Mester and Richmond’s Thomas Barkin echoed Jay Powell’s comments that inflation risks persist and rates will stay higher for longer than financial markets anticipate. With employment looking like it’s starting to soften and a few tremors from regional banks, it is a narrow line they are trying to navigate to ensure a soft landing. How much longer they can go without folding and cutting rates is, of course, key to the dollar’s direction, and markets are watching the window of opportunity for rate cuts starting to close as the US election approaches.

On Wednesday this week, the Fed will release the minutes from its last meeting. Scribblers worldwide will study and analyse these for hints when the first cut will materialise. It is unlikely that any clear signals will be contained in the minutes, but there may be some evidence of concern about the rising unemployment rate. More explicit hints on the Fed’s inner thoughts may come in speeches this afternoon and tomorrow from Fed Governor Christopher Waller, who correctly called the Fed’s pivot. Also released in the US are Existing Home Sales, which should show continued softening as the higher-for-longer interest rate environment continues to bite. Of more interest to those of us on the housing ladder in the UK will be the latest UK inflation data released on Wednesday. With headline inflation expected to be nearing its 2% target, speculation that the BoE will cut at its next meeting will grow, which could see some sterling softening. However, with wage growth and services inflation still hovering around 6% and money supply increasing, the Old Lady is most likely to be cautious, and a cut in September remains the most probable outcome. 

Richard Matthews, Head of FX and Payment Partnerships

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