The ever so tight US labor market begins to crack

KUWAIT: Consumer confidence in the US economy is sinking. A key survey by the University of Michigan shows a sharp drop in sentiment, reaching a sixmonth low. This is driven by the fact that inflation is picking up again, leading consumers to worry about their spending power. That, along with the fact that consumers believe that prices will keep climbing in the future, dampening their overall economic outlook. This shift in sentiment makes it less likely that the Federal Reserve will cut interest rates anytime soon.

Unemployment claims

The latest data suggests a slowdown in the US job market. New unemployment claims reached a high not seen in over eight months, at 231,000 for the week ending May 4. This comes after reports showed the economy added the fewest jobs in six months in April and job openings hit a three-year low in March. These signs of cooling are raising the possibility that the Federal Reserve might cut interest rates twice this year. The US dollar index closed the week at 105.301.

Monetary policy summary

The Bank of England is hinting at a possible interest rate cut in the near future, despite keeping rates at a 16-year high of 5.25 percent. This decision comes as inflation shows signs of cooling down, reaching a twoand-a-half year low of 3.2 percent. While still above the bank’s 2 percent target, the downward trend is encouraging. Forecasts by the Bank of England predict inflation dipping below the target in the coming months, although a temporary rise is expected later in the year. This, combined with a growing sentiment within the bank’s committee favoring a rate cut, suggests a policy change might be on the horizon. However, BoE Governor Andrew Bailey remains cautious, wanting more confirmation that lower inflation is here to stay before taking action. A June rate cut is a possibility, but not yet a certainty. The bank is looking for sustained evidence that inflation is under control before it eases its grip on interest rates.

UK GDP

The UK economy is showing signs of recovery. On a monthly basis, there was a growth of 0.4 percent, following smaller increases in February and January. While on a quarterly basis, there was a growth of 0.6 percent, reversing the declines seen in the previous two quarters. This means the economy is finally expanding again after a period of contraction. The biggest contributor to growth was the services sector, with a 0.7 percent increase in Q1 2024. Additionally, also grew in Q1 2024 (0.8 percent), but at a slower pace than the previous month. The GBP/USD currency pair closed the week at 1.2521

European retail sales

Retail sales in the eurozone increased at its fastest rate since September 2022. The month-over-month figure advanced by 0.8 percent, beating expectations of a 0.6 percent increase, and marginally higher than the downward revised 0.3 percent figure for the previous month. On an annual basis, sales grew by 0.7 percent, reversing the 0.5 percent contraction seen in February, and marking the first positive rate since September 2022. Increases in sales were boosted by food and drinks products increasing by 1.2 percent, while non-food products remained stable for the month.

The eurozone final services PMI was revised up to 53.3, up from early estimates of 52.9. The upward revision was seen in the French services PMI, which was revised to 51.3 up from 50.5. The German final services PMI remained at 53.2, while the Italian and Spanish PMIs remained at higher levels of 54.3 and 56.2 respectively. The EUR/USD currency pair closed the week at 1.0769.

The Reserve Bank of Australia maintained interest rates at a 12 year high of 4.35 percent in line with market expectations. The decision comes amid a hotter than expected quarter to March inflation reading, and weak retail sales data. Australian consumers are increasingly pulling back on spending as elevated interest rates squeeze households, however the central bank warned that despite weakness in consumer spending, “The process of returning inflation to target is unlikely to be smooth.” Furthermore, the central bank warned that “it will be some time yet before inflation is sustainably in the target range and will remain vigilant to upside risks.” However, the Board also adopted a dovish tone by stating that it is “not ruling anything in or out.” Despite recent setbacks, the central bank is sticking to its projection that inflation will fall to its target range by the end of 2025. Markets are pricing the RBA to hold interest rates at the current level for the rest of this year.

BOJ Governor Ueda speaks

Bank of Japan (BoJ) Governor Kazuo Ueda stated on Wednesday that it is “Important for FX moves to reflect fundamentals.” Furthermore, he stated that “if risk of weak yen affecting trend inflation significantly is high, we may need to respond with monetary policy” signaling that he is open to further rate hikes and tightening should the situation require it. Additionally, Ueda warned that “sharp, one-sided” yen declines hurt the economy and is undesirable. Despite the warnings, Ueda stated that inflation was “firmly” moving towards the central bank’s 2 percent target. Moreover, he stated that if “inflation undershoots or downside risks heighten, we must maintain current accommodative financial conditions for a longer period.” In terms of bond purchases, Ueda stated that the central bank will continue to maintain the size of purchases however acknowledged that they will eventually need to reduce it in the future. The remarks by Ueda failed to convince markets that the central bank will deliver a second-rate hike in the near future and caused the yen to decline further.

The USD/JPY currency pair closed the week at 155.72, while the AUD/USD currency pair closed the week at 0.6601.

Kuwait

Kuwaiti dinar

USD/KWD closed last week at 0.30750.