Weekly Outlook: ECB rate decision and US wage figures

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31 May 2024

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Monday 3 June

Full-year results from Sirius Real Estate
First-half results from Hollywood Bowl
Purchasing managers’ indices (PMIs) for manufacturing industries from Japan, Asia, the UK, Europe and US

Tuesday 4 June

Full-year results from Londonmetric Property
First-half results from Chemring and Gooch & Housego
British Retail Consortium retail sales index
US factory orders
US car sales
In the US, quarterly results from Ferguson and HP Enterprises
US jobs reports

From Tuesday to Friday, the US will release a series of reports on jobs data including the Job Openings and Labour Turnover Survey (Jolts) and the official government payrolls data.

The information will be released as markets attempt to predict when a rate cut may be priced in by the Fed. In addition to rates of inflation, Russ Mould, AJ Bell investment director, Danni Hewson, AJ Bell head of financial analysis, and Dan Coatsworth, AJ Bell investment analyst, said employment is one of the main factors for a Fed decision.

“As markets continue to wonder when – and hope that – interest rates will come down, they will continue to study the macroeconomic data just as intently as policymakers, even if this ‘data dependent’ stance increases the risk of policy error,” The AJ Bell team said.

“By definition, the data is backward-looking, or concurrent at best, but monetary policy works with an 18-24-month lag, so the Fed is really trying to determine what is the appropriate cost of money for two years’ time, and not for what it should be now or three to six months ago.”

The Jolts, released Tuesday, is one data set that “may make a case for a rate cut sooner rather than later”, Mould, Hewson, and Coatsworth said. Job vacancies have dropped by 30% after reaching highs in 2022, but still remained at 8.5 million as of March.

The official government payrolls data will be published on Friday. In April, the headline jobs number marked 175,00 jobs added, a weaker number than expected, which could potentially be an argument for sooner rate cuts.

“Economists will also watch any revisions to prior monthly estimates. If revisions are trending lower, this can be a sign that the US economy is weakening, whereas is they are trending higher this is usually an indication that America’s economy is performing well,” Mould, Hewson, and Coatsworth said.

“For choice, the revisions have actually been negative for some time, to perhaps stoke hopes for that elusive rate cut.”

Economists will also watch for wage growth, which was an average $34.75 hourly wage in April. In the past year, this number rose 3.9%.

“Policymakers do not want to see too much by way of wage hikes, as this can filter through into demand for goods and especially services, and thus drive inflation,” the AJ Bell trio said.

“The rate of growth has been cooling for almost two years and that may help to reassure Fed chair Jay Powell and his FOMC colleagues as they inch their way, perhaps, to that first interest rate reduction of this cycle.”

Wednesday 5 June

Full-year results from Workspace
First-half results from Paragon Banking
Trading statement from WH Smith
Purchasing managers’ indices (PMIs) for services industries from Japan, Asia, the UK, Europe and US
US oil inventories
In Europe, quarterly results from Inditex
In the US, quarterly results from Brown-Forman and Campbell Soup

Thursday 6 June

Full-year results from Mitie
Purchasing managers’ index (PMI) for the construction industry in the UK
In the US, quarterly results from JM Smucker and Ciena

The European Central Bank will announce its interest rate decision on 6 June following hinting from ECB president Christine Lagarde that rate cuts could be expected soon.

Markets predict a cut to 4.25% for the Main Refinancing Rate on 6 June, with another two to three to come by the end of the year. Mould, Hewson, and Coatsworth said a cut could have big implications for the UK, with markets pricing in two rate cuts by the end of the year.

These hopes for looser policy and easier credit may be one reason why the FTSE 100 is trading at all-time highs,” the AJ Bell team said.

“The logic is as follows: Central bank interest rates influence the return available from asset classes that are perceived to be lower risk, such as cash and bonds. Ten-year government bond yields are seen as the ‘risk-free rate’ and any other investment should return more than that to compensate for the additional risks.

“The higher the risk-free rate goes, the less inclined, or obliged, investors may feel to take risk and pay up for other asset classes, such as shares (and vice-versa). As such, interest rates affect the ‘P’ in the P/E (price to earnings ratio) – the lower the interest rate, the higher the price investors may be willing to pay (and vice-versa).

“The cost of money also affects activity in the real economy – and therefore corporate earnings, or the ‘E’ in the P/E ratio. In theory, lower interest rates can boost earnings (E) and the price (P) investors are prepared to pay for them, to the benefit of share prices, since price times earnings equals share price.”