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Economic Update

US data signals potential stagflation​

8 minute read

13 May 2024


The Bank of England held rates steady as expected last Thursday. Interest rates have remained at the 16-year high of 5.25% over the previous six meetings as the central bank's monetary policymakers wait for the threat of high inflation to diminish.

Governor Andrew Bailey's comments were described as more optimistic, hinting at a possible rate cut in June. He stated that a cut at the next meeting was neither "ruled out" nor "fait accompli", and it was "likely that we will need to cut bank rates over the coming quarter, possibly more than currently priced into market rates."

Another notable deviation from previous meetings was the voting split. Seven members of the Monetary Policy Committee voted in favour of holding rates, with two voting for an immediate rate cut, a change from the eight to one split in the last meeting. Markets are now divided on what to expect from June’s MPC meeting, with the probability of a cut currently standing at 58.9%.

The outlook for interest rates has changed significantly since the beginning of the year. Currently, only two rate cuts are priced in for 2024, which would see interest rates fall by 0.5%. This forecast is a stark reduction from January, where the market initially expected six cuts in 2024, which would have meant a 1.5% drop across the year.

If the Bank of England does cut rates in June, it would see the BoE take a similar path to the European Central Bank, which is expected to make its first cut two weeks earlier. However, most economists still seem to expect the BoE to wait until August or September before reaching a committee vote that favours a rate cut, slightly ahead of the Fed, which isn’t expected to make its first cut until November.

The Bank of England’s rate meeting was closely followed by the latest UK GDP growth data, which was released Friday morning at 7am. The ONS data estimated economic growth of 0.6% January-March. The estimates also reflect 0.2% growth compared to the same quarter one year ago. This indicates that the UK has come out the technical recession it entered into at the end of 2023.

This week will see a relatively quiet week by comparison. The highlights will be the UK’s Claimant Count Change and the Average Earnings Index which are both due to be released on Tuesday at 7am. The Claimant Count Change, which measures the change in the number of people claiming unemployment benefits, is expected to increase to 13.9K from 10.9K last month, and average earnings are expected to increase by 5.3%, down from April’s 5.6% reading.


With a French bank holiday on Wednesday and Thursday and a German bank holiday on Thursday, it was another quieter week of Eurozone data releases.

The only data out of note last week was HCOB German services and composite PMIs, which were published last Monday. The data came in largely close to expectations, with services and composite readings posting  53.2 against the expected figure of 53.3 and 50.6 against 50.5, respectively. 

The HCOB Eurozone services and composite PMIs came in above forecasts at 53.3 and 51.7, respectively. Other data releases last week include German Factory orders, which came out on Friday morning at -0.4 % against forecasts of +0.4%, and finally, German Industrial production, which was released on Wednesday coming in slightly above forecast at -0.4%.

This week, the European Commission is due to release its latest macroeconomic forecasts. The Commission publishes this report four times a year and focuses primarily on growth and inflation. The previous forecasts released in February downgraded the growth outlook for 2024.

Today also sees the Eurogroup Meetings in which Eurogroup President, Finance Ministers from euro area member states, the Commissioner for economic and monetary affairs, and the President of the European Central Bank meeting to discuss a range of financial issues. The meeting is followed by a formal statement.


Following the Federal Reserve’s rate meeting the week before, it was a quiet week for US data last week.

The two most notable releases came on Thursday and Friday, with the release of US Unemployment Claims and Preliminary University of Michigan Consumer Sentiment Index. The US Unemployment Claims came in above expectation at 231K, against the markets forecast of 212K, which represented its highest level in more than eight months.

The Preliminary University of Michigan Consumer Sentiment Index then came in below forecasts at 67.4, versus the 76.3 expected. This could show a slump in consumer sentiment following rising concerns around sticky inflation and the change in narrative from the Federal Reserve that seemed to indicate interest rates could stay higher for longer than initially expected.

Recent US data could suggest there’s a possibility the US may enter stagflation, as the Fed’s task to deliver on its goals of bringing inflation under control while safeguarding employment is perceived as potentially more challenging than previously thought.

This week, the latest US CPI and PPI inflation data is due to be released, which will give the Fed further insight into what might unfold over the coming months. Any upside inflation surprises could see a less positive impact for the USD than usual, as it could further increase stagflation fears and thus undermine the appeal of USD-denominated assets.

At the same time, evidence that the US inflation resumed its inflationary decline in April could have a less negative effect on the USD given the potentially positive implication on US growth.

The Fed’s preferred inflation index, PPI, will be released tomorrow at 1:30pm and will be followed by a speech from the Fed’s Chair Jerome Powell at 3:00pm. On Wednesday, we’ll see the latest CPI data released at 1:30pm, as well as the latest month-on-month Retail Sales and the Empire State Manufacturing Index.

This commentary does not constitute financial advice. All rates are sourced from Bloomberg and forecasts are taken from Forex Factory


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