Market Report - 22/02/2024
UK economy optimism ; EU inflation remains at 2.8%
The UK economy has continued its positive momentum and has seemingly put the recent recession behind it, but with inflationary pressures remaining stubbornly high, the Bank of England will be cautious about cutting interest rates.
Business activity across the UK private sector in February expanded for the fourth consecutive month and at the fastest pace since last May, supported by another strong upturn in the service economy, the latest S&P Global Market Intelligence PMI survey showed.
February data highlighted a solid improvement in customer demand, as signalled by the sharpest rise in new work for nine months. Hopes of a sustained rebound in domestic economic conditions led to the highest level of optimism for the year ahead in two years.
The British Pound steadied yesterday as the UK Treasury announced it’s largest monthly budget surplus in 30 years, which gives a final insight into public finances ahead of the Spring budget (next month). The official figure for the January surplus sits at £16.7bn.
So far in this fiscal year (since April), the UK has borrowed £3.1bn less when compared to monthly figures 10 months ago. The Office of National Statistics revised it’s estimate lower on government borrowing in the year by £5.8bn. As a whole, the UK’s national debt as a percentage of it’s GDP is still at the highest level since the early 1960’s, though these recent figures provide some positivity.
Conservative Chancellor Jeremy Hunt is now in a great position ahead of the Spring Budget (to be announced next month), with economists at KPMG forecasting that Jeremy Hunt could have £21bn of headroom for tax-cuts or further government spending. It is worth noting that Jeremy Hunt may be more likely increase spending in his next budget announcement as he looks to win over Tory voters, with the Conservatives losing some major seats to Labour in various poll releases.
On a different note, output from UK Manufacturers fell quarter-on-quarter in news yesterday. The CBI’s latest Industrial trends survey reports that 19% of firms suffered a drop in output, although unsurprisingly average prices on products sold has risen.
In monetary policy, Swati Dhingra, the most dovish member of the BOE’s Monetary Policy Committee has warned of risks to the economy if interest rates are left high for too long. Yesterday, when interviewed by the Treasury she argued that delaying rate cuts until there is more evidence that inflation has eased is hurting the back pocket of UK Households, and the economy. Interestingly, Treasury Committee Chair Harriet Baldwin accused the BOE of being the reason the UK Fell into recession, referring to 14 consecutive interest rate hikes.
In further notable releases this week, Andrew Bailey reiterated the BOE’s forecast (and target) to see inflation return to figures around 2%, before he expects to see a rise once again in H2. He also commented that inflation will likely continue to be heavily driven by energy prices, a common theme in the last two years. Bailey also praised the UK for being in ‘full employment’ and that any recession concerns should be measured, adding that ‘we think the economy is already showing distinct signs of an upturn’.
EUR
In Europe, the Eurozone CPI was finalised at 2.8% YOY in January which was exactly how economists had predicted, down from December’s 2.9% YOY figures. Core CPI was finalized at 3.3% YOY, down from prior month’s 3.4% YOY. The highest contribution to came from services (+1.73 percentage points, pp), followed by food, alcohol & tobacco, non-energy industrial goods and energy (-0.62 pp). Analysts and economists alike have been paying close attention to the ECB, looking for clues as to when the central bank is likely to start the rate-cutting cycle in an attempt to support the region’s struggling economies.
USD
The U.S Dollar weakened from recent losses in the last 24 hours as signalling from the Federal Reserve increased expectations that the bank was likely to keep interest rates high in the short-term. Minutes from the Fed’s January meeting showed that the bank was in no hurry to reduce interest rates and was still benefitting from a strong labour market and growing economy. This view was further corroborated this week as several Fed officials reiterated this hawkish stance and instead cited concerns over sticky inflation.