30 May 2024: Labour’s lead has remained constant

The one thing that Sir Keir Starmer feared most about trying to win a General Election came a step closer to being realised yesterday.

Starmer has tried to “modernise” the Party since he became leader, moving away from the infighting, accusations of anti-Semitism and far-left influences that blighted the “Corbyn years.” It all came flooding back yesterday as veteran MP Dianne Abbott, a confirmed “Corbynite”, accused the Party of trying to stop her standing for re-election in the London constituency she has represented since 1987.

She has just been readmitted to the Party, having been suspended for comments she made about the treatment of the Romani and Traveller communities and insulting British Jews. She had been expected to be adopted as the Labour candidate for Hackney North and Stoke Newington.

Using her renowned ability to place doctrine ahead of winning an election, Abbott accused Starmer of trying to keep her out of Parliament and vowed to stand in Hackney by “any means possible.”

In typical Labor Party fashion, what they believed was an issue they had dealt with has now grown into a major concern as the Left has been re-awoken and now threatens to “open the curtain” on splits bubbling beneath the surface.

The Labour commitment to not raising taxes also took a hit yesterday as Jeremy Hunt, who had been goading his opposite number, Rachel Reeves, over the opposition’s policies, which they say are “fully funded.” Hunt has said that the only way that Labour could repair the £38.5 billion “black hole” it threatens to create is to raise VAT.

Reeves had avoided mentioning VAT all week and finally succumbed to Hunt’s provocation and was forced to commit to no rise in VAT, which sowed the seeds of doubt about the level of borrowing a Labour Election victory would bring.

A week after the election was called, this was the first time that the Conservatives had managed to “lay a glove” on Labour. It was the two areas that Starmer feared most and had seen his “mask slip.”

The MPC is fiercely guarded about its independence from the Government. and one thing that Andrew Bailey will want to guard against is any accusations of the Committee favouring one of the main parties over the other.

For this reason, a rate cut in June will be delayed, since to cut rates weeks before the election would draw accusations of favouritism.

Sterling saw its recent gains peter out yesterday as the dollar reasserted itself and began to rally. Sterling fell to a low of 1.2699 and closed at 1.2701.

The cut in rates in the Eurozone expected to happen next week saw the single currency fall to a low of 1.1788 versus the pound yesterday, its lowest level since August 2022, but it drew out buyers who believe that a rate cut in the UK will follow soon, and it rose to close at 1.1758.

Jerome Powell’s favoured measure of inflation will be published later today. The level of personal consumption expenditures is predicted to be unchanged from last month at 3.7%.

This will be the “final nail in the coffin” of any lingering hopes of a rate cut being agreed at the June meeting of the FOMC, which is due to take place on June 12th.

The most recent meetings of the FOMC have been stymied by the lack of significant progress being made in lowering the rate of inflation. Although FOMC members have been “scouring” the recent data releases for clues as to why inflation appears to have stalled, the answer has always lain within the employment market.

The headline level of new jobs created has slowly begun to fade, but still only fell to 175k in April. For a rate cut to be considered at the July FOMC meeting, it will need to have fallen far closer to 100k in May.

The high number of jobs being created means that workers will feel little pressure to “hold on to what they have” and will encourage “job-hopping” which in turn sees average wage increases remain higher than the Fed is comfortable with. While deflation has stalled around the 3.5% to 3.8% level, average wage increases were at 3.9% in April.

This convergence is expected to continue until wages are below inflation and job creation has slowed considerably. This is the goal of tight monetary policy and in an ideal world, the Fed would hope to leave rates unchanged until at least September, so as not to encourage a flare-up in inflation when rates are eventually cut.

Q2 GDP will also play a part in the Fed’s expectations for a rate cut, as the economy is showing signs that output and productivity are beginning to moderate.

Michelle Bowman, a Fed Governor, and FOMC member lamented the delay in cutting the level of quantitative easing which the Fed undertook in late 2021. Bowman believes that had the Fed slowed its bond purchases sooner and reduced the size of its balance sheet, it would have been able to begin to cut rates earlier.

The dollar index appears to have found its “natural low” given the global scenario that is developing around diverging monetary policy. The ECB has convinced the market that it will be cutting rates next week, and this is behind the rally in the index to a high of 105.14 yesterday. It eventually closed at 104.13 and looks set to make further gains.

Klaas Knot, the Governor of the Dutch Central Bank is one of the more “moderate” hawks on the Governing Council of the ECB

Although he was in favour of monetary policy remaining tight, he has more recently been looking for a window of opportunity for rates to be cut.

He has been in favour of the rate cut that is now scheduled to take place next week. He spoke yesterday of the need for the Central Bank to exercise caution about cutting rates further.

“It can soon be appropriate to ease the currently restrictive monetary policy stance and gradually take our foot off the brake,” Knott said yesterday, addressing a group of journalists. He went on to say that “policy rates will slowly but gradually move into less restrictive levels.”

Isabel Schnabel the ECB’s “arch hawk” has finally succumbed to the need for traits to be cut, but she is “going down fighting.”

Searching for a final reason for monetary policy to remain restrictive even after next week’s rate cut, she spoke of the need for the level of quantitative easing to be lowered in the wake of the rate cut, as falling rates lead to the Central Bank “nursing” significant losses.

Schnabel, who oversees bond-buying at the European Central Bank, said in a speech on Tuesday that central banks “need to carefully assess whether the benefits of asset purchases outweigh the costs.”

She praised the use of bond buying by the Central Bank as stabilizing the market in more turbulent times, but as rates fall the practice needs to be carefully considered.

Inflation is always at the centre of Schnabel’s opinions. She spoke recently of the need for the ECB not to become “married” to the idea that next week’s rate cut would mark the start of a cycle of cuts which would see rates fall by up to one hundred basis points.

Since the rate cut(s) would lead to an increase in economic activity and a fall in the value of the Euro, notice must be taken of the effect such stimulus will have on inflation.

Preliminary inflation data was published in Germany yesterday. Average price increases rose to 2.4% from 2.2% in April.

The Euro finally succumbed to the idea that rates will be cut next week. It fell to a low of 1.0800, closing at that level.

Have a great day!