24 February 2023: Labour fail to inspire

The opposition Labour Party, overwhelming favourites to win the General Election that must be held by January 2025, set out its five goals that it will want to be judged on in Government.

Sir Keir Starmer the leader of the Party and Prime Minister in waiting, His boldest pledge was to make the UK the fastest growing economy in the G7.

He also revealed missions to make the UK a clean energy superpower, cut inequalities in healthcare, improve the NHS, reform the justice system and raise education standards.

Starmer, whose leadership has been plagued by a constant battle to modernize his Party while trying to escape the clutches of the Trades Unions, is to be admired for his ambition, but his speech yesterday was short of practical ways in which his goals will be achieved.

For example, improving the NHS will always be a priority not just for a socialist government, but it will first need to drag it into the 21st century while at the same time making sure it is fit for purpose.

Furthermore, to set the country on a course to be the fastest growing economy against such economic powerhouses as the U.S., Japan and Germany will take the reinvention of the country’s manufacturing base which in terms of output has been rapidly overtaken by the country’s service sector which now accounts for 80% of GDP.

It is assumed that all the Labour Party has to do is avoid any serious mishaps to return after what will be fifteen years in opposition. He has already confirmed that he will back the proposed hike in corporation tax from 19% to 25% which is due in April.

This is a hugely unpopular move which has seen a number of larger corporations begin to reconsider relocating to countries with friendlier tax regimes who are prepared to reward innovation and productivity.

The current government is already facing calls to drop the increase in order to bring back investment and innovation to the UK economy.

The restoration of order following the disastrous mini budget that eventually brought down Liz Truss was vital, and Jeremy Hunt was seen by many as being a safe pair of hands, but in order to have any chance in the election, Hunt and Prime Minister Rishi Sunak will need more weeks like the one that has just passed. This has been the best week for the economy since the fall of Boris Johnson, with output in both services and manufacturing moving solidly into expansion while the Government received an unexpected windfall with borrowing six billion pounds lower than expected. The fall in the gas price has meant that the number of households needing to use the energy cap has fallen dramatically.

It may be too late for the Conservatives to retain power, but Labour will need to up its game considerably if it is to achieve its goals.

Yesterday, Sterling ended lower in a fairly directionless market. With traders expecting rate hikes from the U.S. and Eurozone as well as the Bank of England in the coming weeks, the volatility caused by uncertainty over monetary policy has evaporated.

The pound fell to a low of 1.1992 and closed at 1.2023.

The CEO of J.P. Morgan, the global banking giant, is a man whose opinions can move markets. He has been speaking to several financial commentators this week about his feeling that the U.S. is not yet out of the woods when it comes to a possible recession.

In company with several business leaders from both finance and commerce, he was almost strident in his view that any recession would be long and deep when the FOMC began to hike short-term interest rates in increments of seventy-five basis points late last year.

While he feels that the economy is doing well currently, with jobs being plentiful and consumers having money and being sufficiently confident to spend it he feels that the goldilocks scenario of a soft landing or even no landing at all is making consumers ignore the Fed’s overarching desire to drive inflation back to its 2% target.

It was not so long ago that it was considered a real possibility that the Central Bank would be forced to increase its target for inflation, as it would be too damaging to the economy to continue to tighten monetary policy almost indefinitely.

With the FOMC expected to raise interest rates at its next meeting in the middle of next month, the size of the hike remains in doubt even after all this time.

Jerome Powell, the Chairman of the Federal Reserve, is still driven by his desire to defeat inflation following his highly publicized gaffe last year in which he failed to take rising prices sufficiently seriously.

This week’s publication of the minutes from the most recent FOMC meeting, at which the Central Bank tapered the latest hike to twenty-five basis points, were a little confusing to the market and led to speculation that a return to fifty point hikes is possible in March.

A lot will depend on the data that is due for release between now and then. Next week’s employment report will be crucial, as will the size of the expected fall in inflation in February. With economic performance seen as a little sketchy and regional, the FOMC may face a tough assignment in coming to an agreement.

The dollar index drifted fairly aimlessly yesterday. It rose to a high of 104.78 but was unable to push through minor resistance at 104.80 and fell back to close at 104.60.

Christine Lagarde will be halfway through her first term as ECB President in November this year. Her tenure has clearly been affected by the fire fighting that has taken place over, first, the Pandemic and then the Russian invasion of Ukraine.

Being a politician by both trade and nature, she started by using her skills in diplomacy, honed as Managing Director of the International Monetary Fund, to coax a highly diverse group of Eurozone Central Bank Governors into agreement on the direction of monetary policy.

None of those Governors have held their roles for long enough to have to make monetary policy decisions for their own economies, so they faced a dilemma of making collective decisions while also protecting their own national economies.

In such a wide variety of economies with diverse political and social drivers, it was impossible to come to a series of mutual agreements. Mario Draghi had the benefit of being a technocrat and was perfectly suited to dragging monetary union back from the brink of collapse during the financial crisis.

Draghi was well-supported by Angela Merkel, who was willing to use Germany’s economic might to push through reform.

Latterly, Lagarde has aligned herself with one side of the support versus the fight against inflation battle. She has come down firmly on the more hawkish side, even making a pronouncement recent that interest rate would rise by fifty basis points at the next ECB Governing Council meeting, abandoning any pretence at being data driven.

It is surprising that there wasn’t a greater furore over her riding roughshod over the Central Bank’s well-defined democratic process.

Quite possibly, after more than three years in the role of CEO, she feels that she has the measure of her colleagues or the Council has agreed to the hike in advance with the possible proviso that from March onwards they will let the data play a more prominent role in the decision-making process.

In any event, Lagarde has removed any mystery from the meeting, leaving the financial market with at least one constant it can rely on.

Yesterday, the euro barely changed throughout the day, opening at 1.0629 and closing at 1.0630. If quietening down volatility was Lagarde’s intention, she has definitely succeeded.

Have a great day!