Another day and another data print for the UK economy that could determine the timing of rate cuts from the Bank of England. UK CPI for March was a touch stronger than expected, but overall, the disinflation trend remains intact, even if inflation is not falling as fast as expected.

The headline CPI rate rose by 0.6% on the month, although the annual rate fell from 3.4% to 3.2%. The core rate of annual inflation also moderated to 4.2% from 4.5%. The most disappointing element of this report was the service sector inflation, it fell a notch to 6% from 6.1% in February, which is likely to be too high for many MPC members to cut interest rates in June.

A two-speed disinflation race

The detail within the report is interesting and tells the story of two different tracks for inflation, along with very different impacts from commodity prices. The biggest downward contribution to the annual March headline CPI rate came from food, with prices falling vs. a year ago. While the largest upward contribution came from fuel prices, with prices rising sharply this year, although they are lower vs. a year ago.

The commodity price tug of war

Commodity prices are not rising in unison, with staple food prices remaining steady, although energy prices have skyrocketed this year, the price of Brent crude oil is up 16% so far in 2024. The two-speed inflation rate is also visible in this report. Goods price inflation fell in March, with the annual rate of core CPI goods prices decreasing to 0.8% from 1.1% in February. However, service price inflation remains sticky at 6%. This is a good time to buy household goods and furniture, their prices have fallen compared with 2023, however, if you want to eat at a restaurant or stay in a hotel, then the price is 5.9% higher than it was a year ago.

Why the next step for the BoE is tricky

The UK’s two speed disinflationary process: with goods price growth moderating sharply, but service prices remaining sticky, makes things tricky for the BOE. By keeping rates elevated for the long term, they are making life harder for the goods producers, but since services make up a larger portion of our economy, they cannot cut rates too early for fear of stoking inflationary pressures even more.

The impact of this inflation report has been blunted by global factors affecting markets, including a more hawkish Jerome Powell and rising geopolitical tensions in the Middle East. The interest rate futures market has pushed out its expected timing of BOE rate cuts. The market is unsure whether the BOE will cut rates in August or September this year, which still puts the Bank of England on course to cut interest rates before the Federal Reserve. This makes sense, after all, the IMF is predicting that the US economy will grow at twice the rate of any other G7 economy, so a divergence in monetary policy is to be expected.

The cautious cut from the BoE

However, the UK is facing the same inflationary pressures as the US: rising energy costs and stubborn inflation. The risk is that inflation pressures could continue to build, so even if the BOE does cut rates before the Fed, they may not be able to embark on a sustained cycle of easing monetary policy as inflation risks remain. Currently the market is pricing in one full rate cut, and a high chance of a second, although a second-rate cut is not guaranteed.

Dollar rampage on hold for now

The dollar is taking a breather on Wednesday and is the worst performer in the G10 FX space so far today, after rampaging higher for most of this week. GBP/USD has bounced on the back of dollar weakness and the inflation report, which adds more uncertainty about the timing of a rate cut in the UK. Gilt yields are also higher, the 2-year yield is up by 3 basis points and the 10-year is higher by 1 basis point. Overall, we think that the pound and UK bond yields may be more directly impacted by events outside of the UK, including a more hawkish Fed and rising levels of volatility, rather than one month’s worth of inflation data.

Powell rows back on rate cut speculation

Elsewhere, the US 2-year yield is edging closer to the key 5% level after Jerome Powell said that recent inflation data is not giving the Fed confidence that inflation will return to target. However, he did suggest that the Fed wasn’t considering rate increases either, or that the Bank would instead leave rates at their current level for an extended period if inflation was stubborn. This has limited the fallout from his speech and European stock markets opened higher on Wednesday. The focus now is on next week’s US core PCE report and a continued slowdown in wage growth, which is moderating slowly.

ASML sales growth disappointment could be a warning signal for the AI chip makers

European shares opened higher on Wednesday as markets took a breather after volatility spiked to its highest level since late October. However, ASML, the world’s largest supplier to the semi-conductor industry, is lower by nearly 5% at the open after reporting that Q1 orders had missed analyst estimates. The company, Europe’s most valuable tech firm, reported that bookings were EUR 3.6bn for Q1, lower than the EUR 4.63bn expected. In Q4 orders surged by EUR 9.19bn. The company is expecting weaker than expected sales in Q2, before they pick up later this year. The slowdown in demand for its top-end machines was blamed for the decline in orders, which is the first sign that cracks could be appearing in the AI theme that was a powerful driver of markets in Q1. The company did not change their 2024 outlook but pushed the bulk of sales growth into H2. Q1 weakness came from Taiwan and the US, while China growth remained robust, although it is banned from selling its top flight machines to China.

What does ASML’s sales miss mean for Nvidia?

US chip makers such as Nvidia report earnings in the coming weeks, will analysts downgrade expectations on the back of this ASML report? Analysts have upgraded Nvidia’s revenue forecasts for Q1 in the past month. Revenue is currently expected to be $24.09bn, net income is expected to be $13.67bn and earnings per share is expected to be $5.49. These are big numbers, and an earnings miss from Nvidia could rock the market. Futures are pricing a higher open for the S&P 500 later today, but we will be watching Nvidia closely. 

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