Fed hits a bigger bump

• Gold rose +4.5% in USD terms
• Emerging markets equities strengthened modestly in sterling terms (+0.2%)

• Equities broadly weakened, led lower by Japan (-2.7%)
• Bonds also softened, with gilts down around -1.3%

Fed officials seem sanguine about the progress of economic data, but last week’s pay report provides another challenge to this confidence.

At the March Federal Open Market Committee meeting, Chair Powell remained hopeful on inflation and brushed off concerns about stronger CPI prints as “bumps in the road” - confirming that the inflation “story is really essentially the same.” He also maintained his confidence measures of rents and rent-proxies should decline, and that the labour market was easing.

This statement was necessary because recent data prints have been somewhat mixed, with inflation and employment showing greater strength. Inflation has accelerated modestly over recent months and employment appeared to be strengthening in December and January, only to be revised lower in February.
March’s labour report, released on Friday, showed an unexpected surge of 303,000 in non-farm payrolls, ahead of the 270,000 increase in February and economists’ expectation of a rise of 214,000 in March.
Within the report, strength in payrolls was mostly in government contracts, around health and social care, as opposed to private contracts, which tend to lead the economy. Construction and hospitality jobs were also stronger-than-expected, suggesting milder weather could have a role.

Overall, the strengthening saw unemployment decline to 3.8% from 3.9%, despite a rise in participation. Wage growth also accelerated month-on-month, though year-on-year wage growth slowed to 4.1% from 4.3%.

In contrast with this, the Job Opening and Labour Turnover Survey (JOLTS) continues to paint a picture of the labour market easing, with annual declines in hiring, voluntary quits and new openings, and a rise in layoffs. Recent payroll data has also been subject to some significant downward revisions.

The question now is for how long the Fed maintains confidence in the economy slowing, if inflation remains stronger-than-expected. Market pricing suggests confidence in a June cut is fading, with futures based probabilities closer to 50% than 60% before the jobs report.

While we still expect some cuts this year, this recent resilience is a reminder that the Fed may wait longer than the market expects and deliver less.

While the Fed face stronger data, Eurozone inflation is dropping more quickly than expected. The year-on-year rate of headline inflation slowed to 2.4% in March, from 2.6%, while core slowed to 2.9% from 3.1%. This was despite an acceleration in month-on-month inflation to 0.8% from 0.6%.

Within the core print, core goods inflation eased off, while services inflation accelerated modestly. At a headline level, the deceleration in food price inflation persisted, while energy prices picked up modestly.
Inflation data remains modestly above the European Central Bank’s (ECB) latest forecasts, but is tracking downward. Unemployment also remains flat at 6.5% across the Eurozone, with business surveys indicating that hiring intentions have weakened.

This raises the question of when the ECB will begin to cut rates – market participants had expected that April was a possibility. At the March meeting, President Lagarde indicated a preference for June, as more data would be available by then, for the Governing Council to use in its judgement. Market pricing has now discounted the chance of an April hike, with June or July expected. The ECB could cut rates before the Fed.

UK property has been more resilient in recent months than some may have feared. Given the higher share of fixed-rate mortgages compared to a decade ago, the Bank of England expressed concern early in the hiking cycle that the rise in rates could have a protracted effect on the property market, as prevailing market rates would be significantly higher than those on fixed rate deals coming to an end for some time.

House price data suggests the market is in fact recovering. Both the Halifax and Nationwide price indices suggest that prices are up in year-on-year terms, with last week’s Nationwide index accelerating to a 1.6% increase. Mortgage approvals also increased in February - to 60,400 and up from 56,100 in January. Gross mortgage lending also exceeded mortgage repayments in February, for the first time since August.

Business surveys also point to recovery in the property sector. The UK construction PMI edged above 50 in March (a reading above 50 suggests expansion), also for the first time since August. The detail of the survey points to improving demand, and stronger business confidence.

Looking ahead, a recovery in property could support consumer confidence this year. The decline in inflation should also mean that real wage growth is stronger, supporting household spending power.

 

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