Economic Update
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Is the Fed risking a recession?
6 minute read29 July 2024
GBP
Sterling weakened at the tail end of last week following the Bank of England’s decision to cut rates 25 basis points to 5.00%.
However, BoE Chief economist Huw Pill voted against a cut and has warned against cutting rates aggressively soon, as there’s evidence prices may continue to be sticky, with the job of taming inflation potentially still having some way to go.
The Monetary Policy Committee will receive two more releases of inflation data before its next policy meeting. Although cuts are being priced in, the BoE expects inflation to rise back to around 2.75% towards the end of the year before falling again after that.
There’s currently a 62.5% probability of a rate cut at the next meeting on Thursday 19th September, with two cuts priced in before the end of the year.
This week will be quiet regarding data, with the only notable release being the UK’s latest Construction PMI out tomorrow (Tuesday) at 9.30am.
EUR
Flash CPI inflation data for the Eurozone was released last week. The data came in marginally above forecasts at 2.6%, against markets' expectations of 2.5%.
Although inflation came out slightly higher than forecast, markets are still pricing in a cut at the European Central Bank’s next meeting on Tuesday 17th September. Markets have now fully priced in a 25-basis point cut at the following three ECB meetings, with some analysts reporting we could see as many as five cuts in a row from EU policymakers.
The euro has benefited from increased probability of rate cuts in the UK and US. Since Thursday last week, the single currency was up 1.5% against GBP and 1.6% against USD.
The primary data from the Eurozone this week come from Germany; the latest month-on-month Factory Orders data is released tomorrow at 7am, followed by Industrial Production figures on Wednesday at 7am and the July’s CPI inflation data on Thursday at 7am. Last Friday, the US Non-Farm Payroll data came in considerably below forecasts at 114k against expectations of 175k, with unemployment rising to the highest in almost three years. This has fuelled concerns of an economic slowdown in the US, and rate cut probabilities have mirrored this concern with the increasing probability of interest rate cuts from the Federal Reserve. Before the Fed's latest decision to hold rates on Wednesday and Friday’s employment data, markets were pricing in 2.6 rate cuts before the end of the year. This has now been revised up to 4.8 cuts following market speculation that the Fed could risk a recession if it doesn’t act quickly and aggressively. Goldman Sachs economists have increased the probability of a recession in the next year from 15% to 25%. The probability for a 50-basis point cut by the Fed in its September meeting is now at 87%, up from this time last week, when probabilities were at 5%. There is a chance this could be followed up by another 50-basis point cut in the November meeting, although this is currently in the balance. Following these changes in rate cut probabilities, the dollar has begun the week on the back foot, down 0.6% against the euro on Monday morning. This week, the only key data out the US is the ISM Services PMI out Monday at 3pm, and the latest Unemployment Claims out Thursday at 1.30pm. USD
This commentary does not constitute financial advice. All rates are sourced from Bloomberg and forecasts are taken from Forex Factory. Interest rate probability sourced from Bloomberg World Interest Rate Probability.
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