The macroeconomic news from the UK has clearly improved last week. The economic activity reports were upward surprises and continue to point to stable growth. Healthy job creation also took place on the labour market in May. Headline inflation is still sky-high, but core inflation has been falling for two months in a row. The British pound hardly reacted to this and followed the course of the euro against the dollar. Still, all this positive news could well cause a rally of the pound in the coming weeks, especially now that appreciation remains good.
As a result of the disappointing figures on the US economy, yields fell around the world. There is now no chance that the Federal Reserve will raise interest rates by 100 basis points this week. Immediately after the ECB’s surprise rate hike of 50 basis points, surprisingly little changed for the single currency, but it did participate in the overall recovery against the US dollar. Commodity currencies in particular performed very well due to the stabilizing commodity prices.
The main financial news of this week will be the meeting of the Federal Reserve, which will take place on Wednesday. In addition, an important inflation report will be published in both the US and the eurozone (both on Friday). At the moment, markets are mainly wondering how quickly downward pressure on inflation rates will arise now that economic activity is declining in most sectors. The Federal Reserve will also be grappling with this question at its July meeting.
The ECB surprised the markets by raising interest rates by 50 basis points. We had estimated a 50% chance of this happening. The initial positive reaction from the euro ebbed away a bit, as markets still feel they don’t know enough about the ECB’s ‘anti-fragmentation tool’. The ECB will stop its ‘forward guidance’ and will lean less on its own forecasts. This step is urgently needed because, as we have said many times, these forecasts are completely inadequate. This uncertainty, combined with the negative surprises of the PMIs – which seem to indicate that the eurozone economy is stagnating – did not allow the euro to further increase its profit against the dollar and parity came into view. All eyes are now on Friday’s flash CPI figures. Core inflation in the eurozone is not expected to reach its highest level.
There were unmistakable indications last week that the US economy is stagnating. Weekly applications for unemployment benefits continue to rise – but from a very low level. The high mortgage rates are still causing stagnation in the housing market, but the number of new housing projects remains historically high. The most worrying development, we believe, is the fall in PMIs to levels that clearly indicate contraction. Central banks around the world have provided “hawkish” surprises, but we don’t expect the Federal Reserve to do so at its July meeting this week. There is evidence that the US economy is stagnating, which should be enough reason for the Fed to limit the rate hike to 75 basis points. In general, we think that the extreme interest rate hikes are now a thing of the past, and after the July meeting we will again see the well-known increases of 25 or 50 basis points. This could put an upper limit on dollar profits.