A dovish hold from the Bank of England and a 50/50 meeting that went the way of a rate cut from the Swiss National Bank combined with political headwinds and softer PMI readings in Europe to give support to the US dollar this week. Japanese inflation data that came in below expectations pointed to caution from the BoJ on monetary tightening, weakening the Yen to near the 160 level. The RBA's decision to hold rates was seen as hawkish, reflected in a firmer Australian dollar and higher bond yields.
Starting in Australia, commentary locally has centred on the more hawkish elements from this week's RBA meeting. The Board kept the cash rate unchanged at 4.35% but considered the case for a hike, while Governor Bollock said at the post-meeting press conference that the path to a soft landing was narrowing. My note reviewing the meeting offers a different perspective highlighting that little has changed in the data to shift the RBA towards another hike. The Board assesses that policy is restrictive and it is seeing signs of this in inflation and the labour market. Like its peers overseas, the RBA is cautious about how the economy will evolve and is therefore taking a data-dependent approach. By extension, it has retained the guidance that it is 'not ruling anything in or out'. CPI data for May due next week (3.8% expected) will provide a steer on how inflation is progressing through Q2.
Despite some softening in the data flow, signals on US growth remain solid for now. The Atlanta Fed's GDPNow indicator has growth running at a 3% annual pace, while the preliminary PMI readings for June remained in expansionary territory and came in stronger than expected. The headline reading of activity printed at 54.6, a 26-month high for output growth, driven by an uptick in the services sector (55.1). By contrast, data on consumer spending disappointed expectations this week. May sales were weaker than expected at 0.1%m/m and 0.4%m/m for the control group, and April's estimates were downwardly revised to -0.2% and -0.5% respectively.
The August Bank of England (BoE) meeting looks live for a rate cut following this week's developments. May's CPI data reported declines in headline and core inflation to lows since mid-late 2021, while there were signs from the BoE's Monetary Policy Committee (MPC) that it is moving closer to easing policy. Headline CPI fell from 2.3% to 2%yr, matching the BoE's target for the first time in around 3 years, and the core rate eased from 3.9% to 3.5%. These outcomes compare to headline CPI at 4% and the core CPI at 5.1% at the end of 2023, highlighting that the UK, unlike some other countries, has seen the disinflationary process continue at pace through the early part of 2024. Food, energy and household goods have all been key drivers of the decline in inflation, but services prices, though easing from 5.9% to 5.7%yr, remain elevated.
Although there was no change in the voting pattern (7-2) from the previous meeting by the MPC to leave Bank Rate on hold at 5.25%, more members appear closer to supporting a cut. This was outlined in the meeting minutes that noted some members saw this week's call as a 'finely balanced' decision, referencing less concern around services inflation and wage pressures. The two members (Dhingra and Ramsden) already voting to cut assess that easing policy is appropriate given the disinflationary trends and a subdued growth outlook. Market pricing leans towards a rate cut being announced in August, discounting a total of 50bps of easing by year-end.