Economic Highlights

The Bank of England cut interest rates by 0.25% to 5%, but it was a close call, with the vote being 5-4. It was Governor Bailey who swung the decision. Although we believe that this will be the first of several cuts, there was no sense that the Bank is in a hurry to move again. References were made to the ongoing threat from inflation, which remains above the 2% target. Furthermore, UK economic data has been OK – indeed Citigroup’s Economic Surprise Index for the UK has a rare positive reading of +40. The latest S&P Global Manufacturing PMI ticked up to 52.1, for example.

There were no interest rate changes from the Federal Reserve, but very heavy hints of one in September. This left investors dissatisfied in the face of poor economic data, with the opinion growing that the Fed is “behind the curve”. This view was reinforced by a very weak labour market report which showed only 114k jobs being created in July, well below the number needed to account for labour supply growth. Thus, the unemployment rate rose from 4.1% to 4.3%. Hourly earnings growth and hours worked also undershot expectations. The mood has now swung to one of “bad news is bad news”, and the futures market quickly moved to price in more interest rate cuts this year. There is even the possibility of a 0.5% cut in September, especially if the data continue to disappoint.

Eurozone GDP growth for Q2 came in at 0.3% quarter-on-quarter, a little better than forecast. Germany remains the laggard (-0.1%, while France (+0.3%) beat expectations, as did Spain (+0.8%), while Italy (+0.2%) was in line with forecasts. Unemployment rose to 6.5% but is still barely off its cycle low of 6.4%. Futures markets continue to price in a second 0.25% cut in interest rates at September’s ECB meeting.

The latest official PMI data shows a flatlining economy, with the Manufacturing reading at 49.5 and Services at 50.2. Two important gatherings of government leaders failed to produce a meaningful plan to re-energise demand. This weakness is being reflected in commodity prices, with Bloomberg’s Commodity Index breaking to new lows for the current cycle and testing important support levels from early 2022. It is notable that crude oil is also trading towards the bottom of the post-Ukraine invasion range, despite the latest escalation in hostilities in the Middle East.