USD

Last week´s rich trove of labour market data did not resolve the question of whether the Federal Reserve should go for a standard, or a jumbo 50bp cut at its September meeting. Worker demands for higher salaries and the pace of job creation have undoubtedly weakened notably, but the low unemployment rate, which was actually down a tick from July, and the drop in weekly jobless claims indicate that there is little systematic job destruction such as one would expect in the lead up to a recession.

Figure 1: US Nonfarm Payrolls (2023 – 2024)

Source: LSEG Datastream Date: 09/09/2024

This week’s CPI numbers are expected to continue to show that inflation has returned de facto to the Fed target level of around 2%. With futures now only assigning around a 1-in-4 chance of a 50bp cut from the Federal Reserve this month, a sizable miss will probably be needed in order to encourage Powell and co. to go big this month. More high frequency labour and demand data between now and the meeting may also be key in tipping the balance in either direction.

EUR

There is little doubt about the outcome of this Thursday’s European Central Bank meeting, with swap markets continuing to fully price in another 25bp cut. Investors will be keen on hearing the reaction of the central bank to the recent deterioration in Eurozone economic data. The labour market remains a bright spot, as unemployment levels continue to bounce around all time lows, but industrial production numbers out of Germany are very weak, and sentiment indicators are pointing to no more than modest levels of growth.

We suspect that the revisions to the ECB staff projections for growth and inflation will be of equal importance to the euro. These could synthesize the ECB’s view and provide a clear indication of whether to expect a back to back cut at the October meeting. We suspect not for now, although a sizable downward revision to the inflation forecasts may change this view.

GBP

Last week was a rather quiet one in Britain, with little economic news or policy communications of note that would change our outlook on the UK economy. Inflation is nicely converging towards the MPC’s 2% target, economic activity is resilient and the jobs market is generally healthy, despite cooling of late.

Activity looks set to pick up this week, with the latest labour data (Tuesday) and the July GDP number (Wednesday) to be closely watched ahead of this month’s Bank of England meeting. The July labour data should support our view of a still healthy labour market that is providing support to consumer demand, particularly as wages are still outpacing inflation, at least for now. This should support the argument that while BoE cuts are coming, the pace of rate reductions should be relatively gradual. We expect this to continue to buoy sterling, which looks well placed to hold onto its mantle as the best performing G10 currency in 2024.

RON

The past week has confirmed the economic trends observed in the past months. Retail sales increased (7.4% YoY), albeit not as sharply as in the previous month (10%), with the monthly measure (-1.8%) raising concerns about the sustainability of the increases. The GDP data, on the other hand, was unrevised, with growth remaining subdued at 0.8% year-on-year. Subdued economic activity (quarter-on-quarter growth reached just 0.1%) would likely influence a more dovish stance from the NBR; however, this would require further declines in inflation, which appears to be quite resilient.

Figure 3: Romania Real Retail Sales [MoM&3MAA, SWDA] (2022-2024)

Source: National Institute of Statistics (INS) via Bloomberg Date: 09/09/2024

The coming days will help us outline how it fared in August, as Wednesday will bring a fresh CPI reading. It will be followed a day later by wage growth data, a key proinflationary factor, which remains in double-digits in real terms. The week will be rounded off with industrial production data out on Friday.

PLN

EUR/PLN traded sideways in a narrow channel last week. Economic data was scarce, and attention was squarely on the NBP meeting. Although rates did not change (as universally expected), it was an important one. The tone of President Glapinski shifted further in a dovish direction. He signalled that the discussion on rate cuts could take place after the second quarter of 2025, not ruling out an earlier date, however. This confirms our view that rate cuts will return next year, with March and July (the months when the new projections will be presented) being the most likely time for the first reduction.

The zloty’s resilience amid unfavourable conditions is worth noting. At this point, however, it seems to be more of a European phenomenon, with the euro and CEE region generally holding firm. Looking ahead, there will be no domestic economic releases this week that could measurably affect the zloty. The currency is likely to react primarily to external news.

HUF

The GDP revision showed no change in the data while hard macroeconomic data disappointed. Real retail sales came in below expectations again (2.5% YoY), while industrial production registered the biggest contraction this year (-6.4% YoY). More interesting from the markets’ perspective, however, was the news coming from the ruling camp. Prime Minister Orban has hinted that he intends to merge the ministries of National Economy and Finance, appointing one of the ministers (Mihaly Varga – a technocrat overshooting budget deficit for years now or Marton Nagy – an advocate of interventionism) as the new head of the central bank when Gyorgy Matolcsy’s term ends (1 March 2025). As a result of these revelations and increased uncertainty, the forint weakened by around 0.3% against the euro, thus emerging as the worst-performing currency in an otherwise resilient region.

Figure 2: Hungary Real Retail Sales & Industrial Production [YoY, WDA/SWDA] (2022-2024)

Source: Hungarian Statistical Office (KSH) via Bloomberg

This matter will be closely followed by the markets in the coming weeks. Investors will certainly also keep an eye on Tuesday’s inflation reading, which could prove crucial for the upcoming MNB decision (24 September).