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The Dow climbed 0.88%, while the S&P 500 gained 1.17%, ending the session above 5,300 for the first time. The tech-related Nasdaq Composite closed higher by 1.40%.
The Producer Price Index (PPI), which tracks the average trajectory of selling prices received by domestic producers for their output, increased by 0.5% in April. It also showed a 2.2% rise on a year-over-year basis, representing the most significant annual gain.
The rise in services prices was a significant contributor to the overall increase in wholesale inflation, with a 0.6% uptick that represented approximately three-quarters of the total headline gain.
The core PPI, excluding volatile food and energy prices, also experienced a 0.5% increase, surpassing the estimate of 0.2%.
Official figures released on Friday revealed this growth, which exceeded the 0.4% predicted by economists surveyed by Reuters for the previous quarter.
In the latter half of 2023, the U.K. experienced a mild recession due to ongoing inflationary pressures impacting economic performance.
Technically there is no official definition of a recession – however, two straight quarters of negative growth is widely accepted as a technical recession.
The production sector in the U.K. saw an expansion of 0.8% from January to March, whereas the construction sector experienced a decline of 0.9%. The economy witnessed a growth of 0.4% in March on a monthly basis, succeeding a 0.2% increase in February.
According to the Office for National Statistics, the services sector, which is vital to the U.K. economy, grew for the first time since the first quarter of 2023. This growth of 0.7% was primarily propelled by the transport services industry, marking its most significant quarterly growth since 2020.
‘Much Ado About Nothing’ is a comedy by William Shakespeare, written around 1598 – 1599. The play is included in the First Folio, published in 1623, and is set in the Italian city of Messina.
The 2% inflation target set by central banks has been a widely adopted benchmark for monetary policy.
The 2% inflation target became prominent in the 1990s and early 2000s. Central banks, such as the Federal Reserve and the Bank of England, have aimed to maintain inflation at this level.
The Federal Reserve has typically pursued an inflation rate of about 2% since 1996.
In January 2012, then-Fed Chairman Ben Bernanke formally established the 2% target, and subsequent Fed chairs have continued to endorse this rate as the preferred level of inflation.
The 2% inflation target was selected as it provides a balance between preventing problematic inflation and avoiding damaging deflation. Does it work?
Deflation, characterized by falling prices, can hinder economic growth. Central banks target a 2% inflation rate to avert deflation and ensure stability.
The 2% inflation target represents a balance between creditors’ preference for lower inflation and debtors’ inclination towards higher inflation.
In recent years, the global economy has encountered distinct challenges, including sluggish growth, technological upheavals, and demographic changes. Consequently, there is a debate on whether the 2% inflation target requires reassessment.
Despite the efforts of central banks, inflation has persisted below the 2% mark in numerous advanced economies, sparking debates over the potential need to modify the target.
Aiming for a 2% inflation rate can occasionally clash with other policy objectives, like employment or financial stability. It’s crucial for central banks to judiciously manage these competing priorities.
Several central banks are revising their strategies. For example, the European Central Bank (ECB) has adopted a more adaptable inflation target, permitting temporary exceedances to balance out extended periods of below-target inflation.
The Bank of England also considers broader economic factors when setting policy, rather than rigidly adhering to the 2% target.
IIn summary, although the 2% inflation target has been a helpful benchmark, central banks are progressively willing to adjust their strategies in response to evolving economic conditions. The current debate focuses on striking an optimal balance between stability, growth, and adaptability.
Central banks saw this period of inflation as ‘transitory’ – it wasn’t. It could be argued that their lack of action led to a bigger inflation problem overall.
Since Ukraine’s invasion, there has been a roughly 12% drop in trade between the blocs, and foreign direct investments have decreased by 20% compared to those within the bloc’s constituents.
If these divisions persist, the IMF forecasts that the economic impact on global GDP could be as high as 7% in the worst-case scenario.
A senior International Monetary Fund official cautioned on Tuesday, 7th May 2024, that the rift between the U.S. led Western and China-aligned economic blocs endangers global trade cooperation and economic growth.
A catch-up trading session is evident, with mainland-listed stocks having a robust session on Monday 7th May 2024 and continuing to rise. The FTSE reached around 8335 in intraday trading.
Wall Street also experienced another positive session, with the Dow Jones climbing for the fourth consecutive day following the Federal Reserve’s less aggressive stance, and the S&P 500 gaining too. Despite mixed results, earnings have bolstered risk appetite. The low U.S. job count has encouraged traders/investors to take heart that rate cuts will be on the agenda again soon, even if they are now late.
Attention will now turn to the Bank of England (BoE), which faces a decision on whether to guide the market towards a rate cut – the first in four years – or to exercise more patience. The consensus is that it’s premature for a cut this week, with August 2024 being the more likely date, although the Monetary Policy Committee’s (MPC) opinions vary.
Last month the Deputy Governor of the BoE, indicated his readiness to vote for a rate cut with little additional evidence of declining inflation, highlighting the ‘downside risks’ to the BoE’s February inflation forecast. In contrast, the Bank of England’s Chief Economist, expressed a more cautious stance in April regarding the initiation of rate cuts.
Inflation is on a downward trajectory, expected to return to 2% in the next few months. CPI decreased from 3.4% to 3.2% between February and March 2024, and core inflation dropped from 4.5% to 4.2%. However, the BoE is likely to await April’s data before taking any decision.
Persistent wage growth of around 6% indicates continued strength in the labour market. Financial markets anticipate a Bank of England rate cut by August 2024, but it is believed the BoE may be prepared to act as early as June 2024, aligning with the anticipated policy move by the ECB.
The unemployment rate increased slightly to 3.9%, contrary to expectations that it would remain at 3.8%. Additionally, a broader measure of unemployment rose to 7.4%, marking the highest rate since November 2021.
In line with recent patterns, the health care sector led job gains with an increase of 56,000. Notable growth was also seen in social assistance (31,000), transportation and warehousing (22,000), and retail (20,000).
In response to the job data update, market traders now anticipate a strong chance of two interest rate reductions by the end of 2024.
Stock markets jumped higher on the news.
The Organisation for Economic Co-operation and Development (OECD) has projected a 1% increase in the UK’s gross domestic product (GDP) for 2025, which lags behind the growth rates of other G7 nations, including Canada, France, Germany, Italy, Japan and the US.
The OECD, a globally recognised think tank, has described the UK’s economic outlook as ‘sluggish‘ for the current year. The organization attributes the lackluster performance to the cumulative effects of consecutive interest rate hikes in the UK.
Additionally, the OECD has cautioned that persistent elements of high inflation and the uncertainty surrounding the Bank of England’s interest rate decisions may deter investment.
The latest forecast for the UK economy predicts a 0.4% growth for this year, a revision downward from the OECD’s earlier estimate of 0.7% growth. Consequently, Germany is the only G7 country projected to have slower growth than the UK this year.
Amid escalating interest rates and economic instability, an alarming report has surfaced, suggesting that a considerable number of U.S. banks are on the verge of collapse. This potential looming crisis is attributed to various elements that have jeopardised stability.
A recent publication on the Social Science Research Network indicates that up to 186 banks in the United States may be at risk of collapse or at least severe financial damage due to a significant amount of uninsured deposits and the effects of monetary tightening.
The Federal Reserve’s policy to raise interest rates has resulted in considerable asset reductions of these banks. The study emphasizes the susceptibility of banks that depend largely on uninsured depositors, who hold account balances above the FDIC‘s insurance limit of $250,000.
The precarious situation could worsen due to a potential domino effect. Should a substantial number of uninsured depositors suddenly withdraw their funds, it ‘might’ prompt a banking crisis, endangering even insured deposits. It is estimated that nearly $300 billion in insured deposits could be at risk in such an event. Remember the financial crises of 2008/2009 – it wasn’t that long ago.
The collapse of Silicon Valley Bank, for example, highlights the risks associated with rising interest rates and significant withdrawals of uninsured deposits. The bank’s failure to fulfill its obligations resulted in its shutdown, which had an impact on the financial sector.
Although the number of FDIC insured institutions on the so-called ‘Problem Bank list‘ has decreased, the current economic climate has reignited concerns about the stability of smaller banks, particularly those with assets under $10 billion.
These banks face threats from commercial real estate loans and the repercussions of rising interest rates, which could lead to unrealised losses and strain their capital reserves.
As the situation unfolds, it becomes clear that without government intervention or strategic recapitalisation, the U.S. banking system could approach a crisis. This potential crisis could affect not only the banks but also the wider economy and the communities they serve.
Therefore, vigilant oversight and proactive measures are crucial to maintain the stability of the U.S. and the global financial system and protect depositors’ interests.
The U.S. central bank has decided to maintain interest rates, reasoning a ‘lack of further progress’ in reducing inflation. This leaves the Federal Reserve’s key rate at its highest in over two decades, between 5.25% and 5.5%.
By maintaining high borrowing costs, the Federal Reserve seeks to decelerate the economy and reduce inflationary pressures. However, this also increases the financial burden on businesses due to elevated borrowing expenses and on consumers through higher mortgage and loan payments.
However, as U.S. inflation remains more stubborn than anticipated (and that is being generous), the Fed is now being closely scrutinized over its forthcoming actions.
Analysts, who had predicted rate reductions early this year, have had to delay their projections, with some even suggesting a potential rate hike.
Following the declaration, the Fed Chair reportedly expressed his belief that a rate hike is ‘unlikely,’ reiterating the need for more assurance of subsiding inflation before considering a reduction.
‘The decision will truly be data-dependent; it’s going to take longer to reach that point of comfort. I don’t know how long it will take’, he reportedly stated.
The UK’s largest building society reported a 0.4% decrease in house prices compared to the previous month. The average cost of a home now stands at £261,962, which is 4% lower than in the summer of 2022 peak.
According to the report, the increase in borrowing costs was a significant factor in the recent drop in prices.
In recent days a string of lenders raised rates on new fixed-rate mortgage deals.
The rise was driven by expectations that the Bank of England (BoE) would implement fewer and more gradual interest rate reductions.
Headline inflation at 2.4% aligned with economists’ forecasts, while monthly inflation registered at 0.6%. Core inflation, which excludes energy, food, alcohol, and tobacco, fell to 2.7% from March’s 2.9%.
Energy prices’ year-on-year decline softened to -0.6% from -1.8% in March. Meanwhile, the gross domestic product increased by 0.3% in the first quarter, slightly exceeding economists’ expectations.
However, the GDP for the fourth quarter of 2023 was revised from no growth to a contraction of 0.1%, indicating a technical recession in the euro zone for the latter half of the year.
There is growing anticipation that the European Central Bank (ECB) may reduce interest rates at the upcoming monetary policy meeting on 6th June 2024.
Speaking at the ‘Special Meeting on Global Collaboration, Growth and Energy for Development‘ in Riyadh, Saudi Arabia, (see WEF website), he highlighted that global debt ratios are approaching levels not seen since the 1820s.
The WEF president also reportedly emphasized the risk of ‘stagflation‘ for advanced economies. He cautioned that without appropriate economic measures, the world could face a decade of low growth.
The current global growth estimate stands at around 3.2%, down from the 4% trend growth seen for decades. Brende urged governments to address the mounting debt situation and implement prudent fiscal measures to avoid triggering a global recession.
He also noted the persistence of inflationary pressures and suggested that generative artificial intelligence could offer opportunities for developing nations. The International Monetary Fund (IMF) concurs with this concern, reporting that global public debt reached 93% of GDP last year, still 9% higher than pre-pandemic levels.
The IMF projects that global public debt could approach 100% of GDP by the end of the decade.
The battle against inflation persists, gradually impacting the U.S. economy and presenting substantial challenges for the Federal Reserve.
Despite concerted efforts to control it, inflation remains stubbornly remains, leaving policymakers in a dilemma – to stimulate economic growth or to curb spiraling prices.
Recent data presents a concerning scenario. Indexes from the Commerce Department, used by the Federal Reserve as indicators of inflation, reveal that prices are rising at a rate significantly exceeding the central bank’s annual target of 2%. Consumer spending persists, encouraged by the excessive amount of money circulating in the financial system.
However, this spending spree isn’t sustainable, and consumers are dipping into their savings to fund purchases. The personal savings rate has plummeted to its lowest level since October 2022. Borrowing is up and debt is far too high!
The Federal Reserve’s primary inflation gauge, the personal consumption expenditures price index, rose to 2.7% in March, encompassing all items. The crucial core index, excluding the more volatile food and energy prices, remained constant at 2.8%. These figures highlight the ongoing inflationary pressures.
The Federal Reserve is navigating a precarious inflation situation. Should it shift towards rate reductions prematurely, there’s a risk that inflation might surge back in 2024. Conversely, persistent inflation could compel central bankers to not only sustain the present rates but also ponder additional increases. The aspiration for a gentle economic descent is at stake.
Forecasters anticipate inflation to dip below 2.5% in 2024, yet challenges persist. The Federal Reserve faces the difficult task of steering the economy towards stability and controlling inflation expectations. With the central bank’s policy meeting on the horizon, speculation abounds regarding their forthcoming strategy.
Will they maintain the current interest rates or implement more assertive measures? Their decision is set to influence the economic outlook for the foreseeable future.
U.S. inflation continues to be a persistent challenge, and the Federal Reserve’s efforts are ongoing. The path forward demands cautious steering, as policymakers must achieve a fine equilibrium to sustain economic stability while simultaneously curbing inflation.
And remember, the Fed said inflation was ‘transitory’.
The personal consumption expenditures (PCE) price index, crucial for the Federal Reserve’s inflation assessments, climbed at an annualised rate of 3.4% for the quarter, marking the largest increase in a year.
Meanwhile, consumer spending rose by 2.5% during the quarter, a decrease from the 3.3% rise in the previous quarter and falling short of the 3% expectation.
The new all-time high was likely propelled by a weakening pound and reduced tensions in the Middle East. The FTSE 100 has been the laggard for many months.
The index concluded Monday at 8023 points, setting a new record and eclipsing its previous peak of 8012 from February of the preceding year.
At the close, it had risen by 1.62%, with retailers such as, Tesco, Sainsbury’s, M&S and Ocado being among the top gainers of the day.
The shares have gained from the depreciating pound since the London Stock Exchange index includes numerous companies with significant international operations.
A depreciated pound lowers the cost of exported goods for overseas buyers and boosts the value of international business transactions.
On Tuesday morning 23rd April 2024 the FTSE 100 climbed to a new intraday high of: 8080
According to the latest World Economic Outlook released by the IMF, Russia’s economy is projected to expand by 3.2% in 2024.
This growth outpaces the anticipated growth rates for the U.S. at 2.7%, the U.K. at 0.5%, Germany at 0.2%, and France at 0.7%.
The forecast may be galling for Western countries that have endeavoured to economically isolate, restrict and punish Russia for its invasion of Ukraine in 2022.
Russia has demonstrated that Western sanctions on its industries have made it more self-sufficient and that private consumption and domestic investment remain resilient.
Oil and commodity exports to nations such as India and China, (two of the largest countries in the world by population) – as well as alleged sanction evasion and high oil prices, have allowed Russia to maintain strong oil export incomes streams.
Outside of Russia, the IMF has revised its forecasts for Europe and the UK, projecting a growth of 0.5% for this year. This positions the UK as the second-lowest performer within the G7 group of advanced economies, trailing behind Germany.
The G7 also includes France, Italy, Japan, Canada and the U.S.
However, UK growth is expected to improve to 1.5% in 2025, placing the UK in the top three best G7 performers, according to the IMF.
The IMF also reported said that interest rates in the UK will remain higher than other advanced nations, close to 4% until 2029.
Modernising the Bank of England’s forecasting system has become a critical necessity. A recent independent review has cast a spotlight on the ‘serious deficiencies’ within its economic forecasting system, calling for an urgent modernisation.
What have they all been doing for all these years to not have updated their systems?
The review, led by Dr. Ben Bernanke, a former chair of the U.S. Federal Reserve, paints a picture of an institution grappling with outdated systems and under-investment in critical infrastructure. The Bank’s staff, the report suggests, are hindered by software that is not just out-of-date but also complicates the already intricate task of economic forecasting.
This revelation comes at a time when accurate economic forecasting is more vital than ever. The world is still reeling from the effects of the pandemic, the 2008/2009 financial crisis and the UK faces unique challenges post-Brexit. The Bank’s ability to predict economic trends accurately is paramount in crafting policies that safeguard the nation’s financial health.
The deficiencies highlighted are not just a matter of outdated software; they reflect a deeper need for a paradigm shift in how economic data is handled and analysed. The report recommends a complete overhaul of the system, emphasizing the need for automation of tasks that are currently performed manually.
Governor Andrew Bailey’s reportedly responded to the review by acknowledging the gravity of the situation, stating that updating the Bank’s systems is a ‘high priority’. This commitment to modernisation is a step in the right direction, but it should be followed by swift and decisive action, surely.
The Bank of England’s forecasting system is more than a tool; it is the compass by which the nation navigates its economic future. Modernising this system is not just a recommendation; it is an imperative. As the UK charts its course in a rapidly changing global economy, the reliability and sophistication of its economic forecasting are not just beneficial but essential for continued prosperity.
In conclusion, the Bank of England’s economic forecasting system is at a crossroads. The call to modernise is clear, and the path forward must be paved with innovation, investment, and a steadfast commitment to excellence in economic stewardship.
The future of the UK’s economy depends on it.
But a higher-than-expected reading creates more concern as investors push back bets on the timing of the first Bank of England (BoE) rate cut.
Economists expected 3.1% as inflation has been falling gradually since it peaked at 11.1% in late 2022.
Food prices provided the biggest downward drag on the headline rate, the ONS said, while motor fuels pushed it higher.
The core inflation rate, excluding energy, food, alcohol, and tobacco, was reported at 4.2%, slightly above the forecasted 4.1%. Services inflation, closely monitored by U.K. monetary policymakers, decreased from 6.1% to 6%, still surpassing the expectations of economists and the Bank of England (BoE).
The March core inflation figure, remaining above 4%, is expected to fuel speculation that inflation is more persistent than recent projections indicated, potentially delaying the anticipated timing of initial interest rate reductions.
The unemployment rate has seen a slight uptick to 4.2%, a rise from the previous 3.9%. This increase, which is more than anticipated, suggests a softening in the labour market.
Conversely, wage growth appears to be resilient in the face of rising unemployment. Although core wage growth has decelerated, it remains in the region of 6%. This could indicate that employers are maintaining competitive wages to attract and retain skilled workers, even amidst a slowing labour market.
The ONS said employment rate dipped to 74.5% between December and February and the percentage of 16 to 64 year-olds defined as economically inactive rose from 21.8% to 22.2%, which equates to 9.4 million people.
In February 2024, the average weekly earnings were estimated at £677 for total earnings and £633 for regular earnings. This equates to an annual growth in regular earnings (excluding bonuses) of 6.0%, and annual growth in employees’ average total earnings (including bonuses) of 5.6%.
However, when adjusted for inflation using the Consumer Prices Index including owner occupiers’ housing costs (CPIH), the real terms growth for regular pay was 1.9%, and for total pay was 1.6%. This implies that while nominal wages are increasing, the real purchasing power of these wages may not be keeping up with inflation.
The Bank of England will likely approach this data with caution. The combination of increasing unemployment and slowing wage growth could be indicative of a weakening economy, potentially prompting the Bank to contemplate rate cuts.
The response of the Bank of England to these trends will be pivotal in the forthcoming months.
In summary, the UK labour market is exhibiting signs of cooling with an increase in unemployment and a slowdown in wage growth. However, wages continue to grow at a relatively high rate. The real impact on workers will hinge on how these wage increases stack up against inflation.
Beijing’s growth target for 2024 is around 5%.
China’s growth was driven in part by external demand, as export volume grew by 14% year on year.
Industrial output for March grew 4.5% year on year, missing expectations of 6%.
Retail sales grew 3.1% year on year, lower than expectations of 4.6%.
This measure tracks services inflation, excluding food, energy, and housing, which has recently surged, rising 4.8% year-over-year in March 2024 and over 8% on a three-month annualised basis.
The situation is further complicated as some of the most persistent elements of services inflation include essential household expenses such as car and housing insurance, along with property taxes. Wall Street was unsettled by a recent consumer price index report that exceeded expectations, yet the focus is on the ‘supercore’ inflation reading within the data.
Economists also analysed the core CPI, which omits the volatile prices of food and energy, to discern the true inflation trend. The ‘supercore’ gauge goes a step further by also removing shelter and rent costs from its services calculation.
Federal Reserve officials find this measure particularly useful in the current environment, viewing the spike in housing inflation as a transient issue rather than a reliable indicator of underlying price trends.
Supercore inflation accelerated to a 4.8% pace year over year in March 2024, the highest in 11 months.
Adding complexity to the situation is the declining consumer savings rate coupled with rising borrowing costs, which may compel the central bank to maintain a restrictive monetary policy “until something breaks,” according to Fitzpatrick.
Analysts warn that the Federal Reserve may struggle to reduce inflation through additional rate hikes, as the prevailing factors are more persistent and less responsive to stringent monetary policy.
On Wednesday 10th April 2024 the CPI data announcement pushed the markets down and on Thursday 11th the markets recovered after the PPI data was better than expected.
PPI increased by 0.6% in February 2024. Expectations persist for June rate cuts by the Federal Reserve.
The economy grew by 0.1%, figures show, boosted by production and manufacturing in areas such as the car sector. The Office for National Statistics (ONS) said that construction was dampened by wet weather.
The official ONS statistics also revised its previous estimate for January 2024 from 0.2% growth up to 0.3%.
Chancellor Jeremy Hunt reportedly suggested that the new figures were a “welcome sign that the economy is turning a corner”. “We can build on this progress if we stick to our plan,” he added.
That’s good then Jeremy – well done you, nice plan!
The core CPI experienced a 0.4% rise on a monthly basis and a 3.8% increase from the previous year, both exceeding expectations. U.S. stocks also dropped on the announcement.
Recent monthly readings have likely diminished any residual expectations for a Federal Reserve rate cut as early as May, according to some analysts.
Markets remain hopeful for a rate cut this summer; however, the Federal Reserve is seeking consistent signs of disinflation in the upcoming months before deciding.
Treasury yields have risen as stocks declined following the headline news.
As the world’s largest economy continues to surge, questions arise about the Federal Reserve’s next move regarding interest rates.
The unemployment rate fell to 3.8%, indicating strong job growth in several sectors such as health care, construction, and government. While economists had predicted job gains of approximately 200,000, the actual numbers have easily exceeded those expectations.
The labour market’s surprising resilience has caught analysts off guard, leading to speculation about the timing of interest rate cuts.
The Federal Reserve has held interest rates in a range of 5.25%-5.5%, the highest level in over two decades. Initially, the Fed raised rates sharply in 2022 to curb inflationary pressures. However, the subsequent cooling of price inflation (down to 3.2% in February) without a significant spike in unemployment has complicated matters. The central bank now faces a delicate balancing act.
The significant increase of 303,000 in non-farm payrolls for March 2024 reinforces the Federal Reserve’s stance that the robustness of the economy permits a gradual approach to interest rate reductions.
The Fed had been expected to initiate rate cuts this year to mitigate the impact of high borrowing costs. However, the stronger-than-anticipated economic performance suggests that rate cuts may not occur until the second half of this year.
U.S. government spending in areas like high-tech manufacturing and infrastructure has bolstered the labor market. Additionally, an influx of more than three million immigrants last year has expanded the workforce, potentially keeping wage pressures in check. In March, average hourly pay rose by 4.1% year-on-year, consistent with expectations and near a three-year low.
President Joe Biden hailed the latest job figures as a “milestone in America’s comeback.” However, some market analysts argue that the strong jobs growth could complicate efforts to return inflation to the Fed’s 2% target. Some analysts even speculate that rate cuts may not materialize until 2025.
Higher U.S. interest rates have ripple effects worldwide, enticing investors to shift capital toward America. While the Fed’s in-tray still has some warnings, the delay in rate cuts reflects the economy’s underlying strength.
The U.S. jobs boom presents a conundrum for policymakers. Balancing economic vitality with inflation control remains a delicate task, and the Fed’s decisions will reverberate far beyond its borders.