G10 Currencies catch up: Inflation still not tamed

Mr. Adelino Izidro
Feb 5, 2024
6 min read

Updated: Apr 26, 2024

In the previous week, we had 4 major economies key economic data printed. Providing an overall picture of the state of their respective economy. For some economies, data provided mixed feeling and for some extremely strong data which are making market reassess projections.

In this article:

1. Euro Area

2. Australia

3. United States

4. United Kingdom

Euro Area

GDP – EU managed to escape a technical recession by the economy remaining unchanged from previous quarter – 0% from Q3 to Q4. The expectation was for a contraction of (-0.1%), which would mark a 2nd consecutive quarter of contraction. Portugal, Spain and Italy led the growth with 0.8%, 0.6% and 0.2% respectively. While Germany led the contraction with a (-0.3%) and France remained unchanged from Q3 to Q4. The 2 biggest economies in EU are in recession territory: Germany has now (2 years) in contraction – their GDP annual growth rate came out at (-0.2%) with previous year´s growth rate at (-0.3%) – while France has experienced 0% in the past 2 quarters.

Inflation – Inflation seems to continue its slow trend to targeted level with the bloc´s Yearly flash inflation rate unchanged at 2.8% (as expected) but Monthly rate decreasing at (-0.4%), which was more than expected. This is a reflection of energy price decrease as the bloc´s measure of Yearly Core inflation was at 3.3% when expectation was for 3.2%.

ECB – in the previous ECB press conference, President Lagard affirmed that they are “data” dependent and not “date” when asked if markets should expect cut by summer. The president reiterated that they shall adopt a “wait and see” approach to properly monitor key economic data (mainly CPI) to determine the right time to start monetary easing. With GDP and CPI at current figures, we believe ECB officials wants to see Core CPI figures consecutively print lower before proceeding with rate cuts. February CPI data will provide guidance to markets participants on whether inflation is really on its downward path.

Australia

Inflation – Inflation printed out less than expected by markets. This is fuelled by a change in consumer spending habit decrease economic confidence & activity and lower energy prices. China´s weaking economic data and US strong data are putting downward pressure to economic sentiment, thus leading to less spending and potential measures of austerity from consumers.

Iron Ore – Iron Ore prices have been slowing which contributes to lower inflation, economic activity and GDP figures.

GDP – Australia´s GDP right now pretty much resumes to what the US and China does. Since China economic data is weak and US economic data is strong, it is expected that GDP of Australia shall continue to decrease. Chinese NBS Manufacturing PMI printed at 49.2, which shows contractions in the manufacturing industry, thus adding more downward pressure to Australia´s GDP.

United States

Inflation – with strong employment data, markets will now have to reassess actual and expected inflation figures.

FED – policy rates was kept unchanged. FED chair Powel tone and attitude was of very certain and confident. This is because he knows the economy is strong. Stating that 6 months of inflation slowing is not good enough to cut rates.

They are confident but they need further confluence to loosen monetary policy.
The governor acknowledged that the economy is good and they have done a good job with inflation.
When asked if inflation stays where it for next 6 months, he mentioned that they will keep rates up, but if inflation is good, they may cut earlier.

In 6 months should inflation be close to 2% (PCE) they will change the policy projection. Consumer confidence is low when unemployment rate also is low, and the Governor thinks that this is due to high prices as it robs the consumer´s purchasing power.

Before the meeting, markets bought the news of rates cutting early in March but then sold it when Powell spoke with a firm tone that it would be premature to do so.

Markets now are questioning if economy is actually restrictive enough. This is due to strong economic figures being printed and equity market being at all-time high.

Employment – to most of the market disappointment, last Friday, the employment data for US came out pretty strong, splashing cold waters on market participants expecting an early cut in March and sending a message that the US economy is strong. Non-Farm Payrolls printed at 353K when expectation was for 180K; Unemployment rate which was expected to increase to 3.8%, was unchanged at 3.7%. Michigan Consumer Sentiment Final also edge higher from previous month data at 69.7 to 79.0 (expectation was 78.9).

GDP – at the beginning of the week, US ISM and S&P manufacturing PMI data sent mixed signals to the market. The ISM printed at 49.1 while the S&P printed at 50.7.

The quarterly unit labour cost, increased 0.5%, which was less than expected (1.6%).
The quarterly non-farm productivity also edged higher at 3.2%, higher than expected (2.5%).

Overall, the employment data was the key data to blow up the fob in the mind of market participants as productivity data sent mixed signals.

United Kingdom

Inflation – December´s annual inflation came out higher than consensus at 4% and it is expected to be within the 3% level by the end of Q1. November´s forecast is currently higher than December´s, this is due to sharp decrease in the price of Oil & Gas.

A risk to higher CPI is BOE cutting rates sooner than required, as this not only will lead to higher spending in the economy and increase the pressure for higher inflation, but it would also increase the outflow in GBP seeking higher yield in USD denominated assets which would decrease the value of GBP with its trading partners thus, increase the cost of import which in turn would be passed on to consumers.

BOE – The Bank of England kept interest rate unchanged at 5.25%, stating that rates will have to be higher for longer in order to not only bring inflation to the targeted level of 2%. They are expecting inflation to reach the targeted level but to rise again later on.

Given the increased geopolitical tensions, the BOE cannot rule out another geopolitical event which may lead to higher prices for longer.

GDP – The British economy expanded 0.3% month-over-month in November 2023, rebounding from a 0.3% fall in October and beating market forecasts of a 0.2% rise. It is the strongest GDP growth in five months. While year-on-year, it grew 0.2% in November 2023, rebounding from a revised 0.1% fall in October and matching market forecasts.

It is now expected that the economy continues growing at a very slow pace and narrowly escapes a hard-landing scenario, but this is assuming the BOE loosens monetary policy on time. Markets are critisezing the BOE as they do not believe UK is able to withstand high rates at current levels.

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