Higher for longer

Higher for longer

Higher for longer

Its looking increasingly likely that we will have interest rates staying higher for longer in the major economies than anyone thought at the start of the year amid stubbornly higher than expected inflation rates.

In the USA, the first-rate cut is now only fully priced for November. We started the year with the money markets pricing in up to four rate cuts totalling 1.5% in total by the Fed (Federal Reserve).

In the Bond markets, traders are going one step further and are preparing for a scenario where the Fed doesn’t cut rates at all this year.

Currency Exchange Rates Update

The Pound Sterling started the year as the best performing G10 currency despite the technical recession of the UK economy at the time thanks mainly to the money markets expecting the BoE (Bank of England) to keep UK interest rates higher for longer than its main counterparties, the Fed, and the ECB (European Central Bank).

Halfway through April, the Pound hit a 3-week high against the Euro last Friday.
Against the US Dollar, the Pound fell to a 5-month low after the Dollar enjoyed its strongest single week since 2022.

What’s in the news?

According to the latest statistics from the UN Conference on Trade and Development (UNCTAD), the UK has become the world’s fourth largest exporter thanks to a boost in services exports which have grown in recent years to a reach a record high of £470 bn in 2023.

In 2021, the UK was ranked seventh but has since overtaken France, Netherlands, and Japan to take fourth position, behind only China, the US, and Germany.

Business and Trade Secretary Kemi Badenoch welcomed the news saying, “These new figures show how the UK is punching above its weight on trade and is on track to reach our ambition of exporting a trillion pounds of goods and services a year by 2030. The appetite for world-class UK produce continues to grow and this government will keep supporting our brilliant businesses, helping to create more jobs, pay higher wages and grow the economy.”
The Department for Business and Trade (DBT) is still negotiating several trade agreements, including with India and last month signed a trade pact with Texas, the second biggest US state and the world’s eighth largest economy.

The Sunak government has announced it is suspending import duties on 126 items on goods which aren’t produced in sufficient quantities in the UK. It also said eleven other existing suspensions would be extended.

Analysis by specialist credit insurance firm Allianz Trade said the removal of tariffs on the goods would reduce inflation by 0.6% and cut import costs by close to £7 bn in nominal terms.

UK

Good news

The ONS (Office for National Statistics) reported that the UK GDP rose by 0.1% in February, thanks to gains in the production and services sectors. The ONS also revised up its figures for January growth from 0.2% to 0.3% in a further sign of positive momentum.

The numbers add to evidence that the UK economy will grow in the first quarter of 2024, reversing the shallow recession recorded in the second half of 2023.

The manufacturing PMI (Purchasing Managers Index) rose above the break-even 50 level for the first time since July 2022.

Data from the BRC (British Retail Consortium) revealed UK shop price inflation eased from 2.5% in February to 1.3% in March, the lowest in more than two years.

Not so good news

Adyen and the CEBR (Centre for Economic Business and Research) reported that the UK retail industry suffered a loss of £11.3 bn due to fraud in 2023.
Nationwide reported that UK house prices have fallen month-on-month for the first time this year, suggesting the market may be stagnating due to high mortgage rates.

USA

The US economy continues to outperform, adding 303,000 new jobs in March, well above the consensus forecast of 214,000. It was the fourth consecutive above 200,000 result and represents the 5th longest expansion in US history. The unemployment rate dropped to 3.8%.
However, US inflation rose more than expected to 3.5% in March. Its also the second monthly increase in a row as the Fed considers how long to keep interest rates at their 23-year high.

The New York area’s strongest earthquake in 140 years rattled northern New Jersey earlier this month, shaking office buildings in Manhattan and halting air traffic. The preliminary 4.8 magnitude tremor occurred near Whitehouse Station, New Jersey, and was felt as far away as Massachusetts and Washington DC.

The EU

Last Thursday, the ECB held interest rates steady for a fifth straight meeting, as anticipation builds for a rate cut in June.

The preliminary March Eurozone inflation report matched November’s 28-month low at 2.4% year on year with the core rate cooling to an over 2-year low. Other economic data showed buoyant services PMI reports but disappointing retail sales and sluggish growth in German factory orders.

German data continues to indicate a significant slowdown in inflationary pressures in Europe’s largest economy.

France is now the third most indebted EU country after Greece and Italy with a debt to GDP ratio of 110.6%. In the past year the deficit has increased by €18 billion more than anticipated. Yet most French people surveyed believe public services are deteriorating. France is also the most heavily taxed EU nation with a tax to GDP ratio of 48.4%.

The Spanish economy is performing strongly with house price growth of 4.2%. Credit ratings agency Moody’s have revised their outlook for Spain from stable to positive.

Italy seems to be on course to achieve a soft landing for its economy with moderated growth and falling inflation with unemployment at a 16 year low of 7.2%.

Others

Credit ratings agency Fitch revised its outlook on China’s debt from stable to negative, matching a similar action by Moody’s Investors Service in December.
HSBC reported that the Chinese and Hong Kong stock markets lost $4.8 trillion in market capitalization since 2021, more than the value of the entire Indian stock market.

China and Hong Kong sold off nearly $5 trillion, worth more than India’s stock market (cnbc.com)

The shift from China to India seems to be picking up steam with Apple assembled $14 billion worth of iPhones in India in the last fiscal year, doubling production in a sign it’s accelerating a push to diversify beyond China.

Canada announced it will relax rules on mortgages to allow first-time buyers to take out 30-year loans when they purchase newly built homes. The change to regulations on insured mortgages comes into effect on the 1st of August.

It’s all-go in the commodities market. Gold has hit a new fresh all-time record; Copper has reached the highest level since June 2022; Zinc is trading at the highest level in a year; Iron ore is headed for its best week in two years and oil is at a 7-month high.

Taiwan’s strongest earthquake in a quarter century levelled dozens of buildings on the eastern side of the island, killing at least seven people. The tragedy has potential repercussions for global markets and the economy, because of the critical role Taiwan plays in the manufacture of advanced chips, the foundation of technologies from artificial intelligence and smartphones to electric vehicles.

Which country has done best in cutting CO2 emissions since 1990?

The UK with a 42% drop and the biggest reduction in emissions relative to GDP.

Quote

“If you can’t explain it simply, you don’t understand it well enough” by Albert Einstein.

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1 thought on “Higher for longer”

  1. Avatar for Carole Curtis

    Hello Tony,
    Thank you for sharing your April Newletter.
    It was a great read and packed full of information that I need to know about the market to keep me fully informed about what is happening with the financial markets in my neck of the woods.
    Warmest regards,

    Carole Curtis
    Founder/Director
    DFB Commercial Pty Ltd
    Australia

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