Macroeconomics

When the Bank of England (BoE) cut interest rates for the first time in four years earlier this month, we thought the move – made on a knife-edge 5-4 vote – had come a little too early.

Recent US Consumer Price Index (CPI) inflation data brought good news for investors and central banks.

Second quarter growth data for the Eurozone on Tuesday reaffirmed the gradual uptick in the region’s trajectory relative to the pace seen across 2023, with quarter-on-quarter (QoQ) growth slightly higher than expectations at 0.3%.

The last few weeks have seen former President Donald Trump establish a lead over current President Joe Biden across polls in the run-up to November’s US election. Even though it is early days and a lot can change before November (including the Democrat candidate), it is worth considering what a second Trump term might mean for the world economy and for fixed income markets.

Last month saw the European Central Bank (ECB) get their cutting cycle underway with a 25bp cut in the deposit rate to 3.75%. However, any expectations for a rapid series of reductions after the first move were tempered by President Christine Lagarde, who at the subsequent press conference was clear that the ECB could move in phases in which they left interest rates unchanged.

There is little disagreement among investors and economists that the last few years have been highly unusual in many respects. An inflationary shock in developed markets, one of the fastest rate hiking cycles on record, the worst year in decades for government bonds (2022), and mild recessions with no movement in unemployment are just a few of the dynamics that have strayed from recent norms.

One of the drivers of the dovish pivot from the Federal Reserve (Fed) in December was the acknowledgement that the risks to the policy outlook had become more two-sided. In other words, while higher rates were still needed to tame inflation, the Fed saw a risk that staying restrictive for too long and risk damaging a labour market that has so far shown remarkable resilience.

For any fixed income investors that follow the England football team, the plan for H2 2024 may feel somewhat familiar – no substitutions in the second half.

The latest UK inflation figures will bring some relief for consumers, but beneath the headline figure the Bank of England’s (BoE) policymakers face a more complex picture that suggests interest rate cuts may still be some way off.

For the fixed income fanatics amongst us, June was always going to be one for the books with all three of the major central banks meeting, elections, and continued data.

In spite of what looks like a quiet week ahead, there are a couple of data releases in the coming days that require close attention, these releases could potentially disturb the fragile calm that we are enjoying in the first trading hours of the week.

The UK’s Office for National Statistics (ONS) released their monthly inflation report this morning. In spite of April’s numbers showing a marked decrease in most inflation measures, it is fair to say that the report was significantly worse than expectations.