Focus on Powell’s testimony to Congress
The euro and sterling are both marginally firmer against the dollar following softer than expected US economic data yesterday and ahead of Fed Chair Powell’s testimony on the outlook for monetary policy later today. They are trading just north of $1.0850 and back above $1.27 respectively this morning, leaving the euro-sterling cross still at around 85.5p.
The softer than expected economic data and weaker stocks contributed to a decline in government bond yields, with 10-year yields 5-10bps lower on the day. In equity markets, the S&P 500 shed around 1% as it backed off further from its recent all-time high while European stocks were down almost half a percent.
In the US, the ISM index of services activity fell back in February but remained above the 50 level, pointing to ongoing but more moderate growth in this sector of the economy. Separately, factory orders fell again in January suggesting manufacturing continues to struggle.
The latest Exchequer returns in Ireland show tax receipts maintaining a strong performance over the first two months of 2024, up 5.5% on the same period in 2023, while government expenditure was running well ahead of a year earlier. An Exchequer deficit of €0.1 billion was recorded to end-February, compared to a deficit of €2.5 billion for the same period last year. On a 12-month rolling basis, there was surplus of €3.6 billion.
Looking to the day ahead, the main focus will be on Powell’s appearance in Congress to discuss the outlook for the US economy and monetary policy. When the Fed left interest rates unchanged at its last meeting in January, it said it “does not expect it will be appropriate to reduce (rates) until it has gained greater confidence that inflation is moving sustainably toward 2%.” Data published since then shows inflation has nudged down further, but the Fed will probably want to see it decline some more before indicating it is prepared to lower rates.
The Chancellor of the Exchequer in the UK presents his Spring Budget later today as well, which could be his last big set piece before a general election. Media reports suggest he will announce a further reduction in employees National Insurance, which is a cheaper option than cutting income tax, though he will pay for this with tax increases elsewhere and/or expenditure cuts (with the overall boost to the economy likely to be limited).
Economic data wise, retail sales are due in the Euro area and the construction PMI in the UK, while US data include job openings and the ADP employment report.