The electoral week kicked off yesterday when the French went to the polls in the first round of what, to an outsider, is a complex process. Le Pen’s party did well but now onto the next round with the only assured outcome being change for both France and Europe. The UK has its general election this Thursday, and saying it would be a shock if Labour didn’t win comfortably would be an understatement. The result is undoubtedly priced into sterling, and initially, at least, there shouldn’t be any immediate repercussions in the financial markets. With the election over, the Bank of England will be freed from its recent shackles and able to follow its wish to cut interest rates with a cut possibly as early as August, although the smart money remains on a drop in September.
The phrase more questions than answers rather neatly sums up the current financial markets, with US data being the fulcrum of the conundrum. As if to underscore the issue, Jolts were subtly disappointing, as one analyst said, whilst last Friday's Non-Farm Payrolls beat all expectations. Fed officials are equally contradictory, but less and later, with regard to interest rate cuts, it seems to be the overriding message.
The plethora of central bank meetings last week at least delivered one cut in interest rates. The Swiss National Bank was the surprise outlier as it edged its rates lower by .25%, the first central bank to do so. It possibly jumped the gun as it holds quarterly meetings, and if it hadn’t moved now, it would have had to wait until June, which they perceived as being too long and now its odds on another cut then.
The markets received a couple of shocks last week from hotter-than-expected inflation data in the US. The prices data may cause a recalibration in the dot plot and higher US 10-year yields, but so far, it has done nothing to dampen the enthusiasm of the S&P 500 fans.
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The dollar eased back markedly last week, mainly in response to Chairman Powell's testimony to Congress, which was widely perceived as dovish. As always, with a speech from a central banker, the words are open to interpretation, and the temptation is always to hear what you want to hear, which the markets duly did. The general message from Powell was one of caution and to wait and see what the data brings with regards to inflation and data, which brings us neatly to last Friday's Non-Farm Payroll figures, which, despite a strong headline, did show signs of weakness.
The last seven days have witnessed a significant milestone in global equity markets, as major indices like the DOW, S&P 500, DAX, CAC, and even Nikkei all reached new record highs. The wind in the equity market’s sails can largely be accredited to positivity surrounding artificial intelligence and the broader tech sector.
Minutes from the European Central Bank's most recent interest rate decision were released on Thursday and showed a surprising resilience in holding interest rates high despite the economic weakness seen in many parts of the continent. ECB officials signalled they needed to wait at least until the end of Q1 and would need to see consistently declining inflation, slower wage growth and a modest economic recovery in order for them to lower interest rates.
Another week ended with the markets facing more questions than answers. The UK appears to have good employment and retail sales whilst in a recession, with wages growing almost uncomfortably fast. When taken as a whole, the economic picture looks increasingly like one of stagflation. It also doesn't look like Prime Minister Sunak will get the improving economic conditions he was hoping for and will probably be forced to push the election back as far as it can go, possibly until December.
A quiet week was had by all last week, with currencies mainly on the sidelines as US equities hogged the headlines. New high upon new high with the S&P 500 breaking 5000 for the first time. With the strength shown by the last US Non-Farm payroll figures backed up by the most recent weekly figures, it seems onward and upward for the US economy without a care in the world.
Both the US Federal Reserve and the Bank of England disappointed the more optimistic players in the markets this week. The Bank of England was not as dovish as markets had been expecting and even had two members of the Monetary Policy Committee voting for a further 25bp hike. However, this was partly offset by the perma dove Swati Dhingra voting for a cut. It became clear that the bank would be as hesitant to cut as it was to hike. Indeed, it is difficult to see problems ahead when looking in the rear-view mirror.
