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9 May 2024 | 5 minutes to read
All eyes were on the Federal Open Markets Committee (FOMC) last week, not because a change to monetary policy was expected, but to see if the Federal Reserve’s (Fed) guidance on rate cuts would change. In the event, there were minimal changes to either.
On the policy front, the Fed funds rate was left unchanged, while FOMC members did vote to slow the pace of the runoff to balance sheet assets (quantitative tightening) from $60bn a month to $25bn.
On the guidance front, there were small adjustments to the policy statement, which acknowledged that “in recent months, there has been a lack of further progress toward the Committee's 2 percent inflation objective”, in response to persistently stronger inflation prints.
In his comments, Fed Chair Powell went somewhat further, saying “our confidence [that inflation was moving sustainably at 2%] didn't increase in the first quarter… we came to the view that it will take longer to get that confidence... but there are paths to not cutting. And there are paths to cutting. It's really going to depend on the data.” However, he did also reiterate “it's unlikely that the next policy rate move will be a hike… I think we'd need to see persuasive evidence that our policy stance is not sufficiently restrictive…that's not what I think we're seeing.”
The modest adjustment to the statement was received as dovish by the market, with limited impact on futures prices. This was then underlined by Friday’s soft nonfarm payroll (labour market) data. After a strong March increase of 315,000 jobs, payrolls increased by 175,000 in April, far below expectations. Together, the two months average of 245,000 is in line with prior months.
Within the payrolls print, the slowdown was in both government and private sector jobs, and within the private sector it was services and construction which decelerated most notably. Unemployment also ticked up to 3.9% from 3.8%, while the labour market participation rate remained flat. Looking at wage growth, this slowed to 3.9% from 4.1%, with monthly growth slowing to 0.2% from 0.3%.
With the Fed in data dependent mode once again, employment and inflation data will remain key. Futures prices continue to indicate at least one interest rate cut this year, likely in the autumn.
UK data is painting a mixed picture of the economy. Money and credit data, released last week, showed an outsized increase in household’s total liquid assets of £8bn in March. This suggests some consumer caution. At the same time, mortgage approvals increased to 61,300 in March, from 60,500 in February, and gross mortgage lending increased to £20bn - the highest level since February 2023. This was expected, given the rise in remortgage applications seen in February and likely reflects the fact that new rates being offered in February were low. Remortgage activity cooled in March, so momentum in the housing market may be bumpy.
Looking at house prices, the Nationwide index shows prices fell -0.4% in April, after a -0.2% decline in March. This takes year-on-year growth to 0.6% from 1.6% in March, and likely reflects higher new mortgage rates now that rate cut expectations have been pared back.
Looking at construction activity, Purchasing Manager’s Index (PMI) data suggests house building activity cooled in April on softer demand, though civil engineering work increased. The overall construction PMI increased to 53.9 in April, from 50.2 in March.
Other spending activity has been soft. New private car registrations were 50,500 in April, below the pre-pandemic average for the month of 74,000. In contrast, fleet sales were more buoyant.
Retail sales data also showed some softness, with a -4% decline in like for like sales in April. Given poor weather and the early timing of Easter, the underlying data is less bad than the headline appears, but sales activity still points to softer demand.
Looking ahead, we expect activity in the UK to improve in the second half of the year, but softness now will likely smooth the way for the Bank of England to consider interest rate cuts in coming months.
Economic activity appears to be broadly picking up in the Eurozone. GDP growth recovered by 0.3% quarter-on-quarter (QoQ), after a -0.1% fall in Q4 2023. This was stronger than the 0.2% recovery economists had expected. However, looking within the print, net exports were a strong driver of the stronger print, with domestic demand remaining softer. GDP in Germany advanced by 0.2%, boosted by increases in exports and construction investment (helped by mild weather), while private consumption declined. In France, GDP growth accelerated to 0.2% QoQ in Q1 from 0.1% in Q4, supported by household consumption and a rebound in gross fixed capital formation (tangible assets). Italy’s economy expanded by 0.3% QoQ in Q1, up from 0.1% over the prior quarter, boosted by exports. And GDP in Spain continued to surge, delivering a second quarter of 0.7% growth. At the same time, Eurozone inflation continues to cool, setting the scene for rate cuts later this year.
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