15 July 2024: Starmer’s magic wand

Is it a lack of experience or bravado that is leading the Government’s “top team” to make highly speculative claims about the economic situation in the country?

While in opposition, Keir Starmer was constantly criticising the Conservative Chancellor for predicting levels of growth above the forecasts of the IMF and other global bodies, now after a little over a week in Government, the PM is indulging in the same practices.

Labour’s plans for the economy, in its first year in Government for fourteen years, hinge on its ability to promote a level of growth that means that it will not be forced to raise taxes or cut public spending.

Rachel Reeves, a 45-year-old economist, has been central to the Prime Minister’s plan to turn the Labour Party from the threat of obscurity five years ago into the party of government.

Reeves, a disciple of former Bank of England, Mark Carney, set Labour on a pro-business path based on promises of “stability” and fiscal discipline, claims she faces “the worst set of circumstances since the Second World War.”

Although it is too soon to label her “the darling of the City,” the market has been impressed by the plans that have been announced so far.

Her proposed plans to shake up planning regulations have caused a stir from environmentalists due to her “disrespect” for “green belt” land that was previously considered “off limits” for development.

Former Labour Leader, Ed Miliband, who has resurfaced as Energy Secretary has immediately lifted the ban on onshore wind farms revealing three new projects that threaten the nation’s food supply, under the banner of energy self-sufficiency.

He has also sparked controversy about his attitude to new offshore drilling licenses in the North Sea.

There is some confusion about what exactly has been banned. Oil companies have licenses that have been applied for and are in the throes of negotiation have been halted, while the Department for Energy Security and Net Zero, stated over the weekend that no new licenses will be granted for exploration of new fields will be granted, but any that have already been applied for will be subject to continued review.

These are the “high-level” strategies that will promote a greater degree of output in the economy, which will eventually lead to improved GDP.

The King will attend the State Opening of Parliament later this week when he will set out Starmer’s plans for which Bills he wants to be debated and passed during the first year of the new Parliament.

After that, the “meat will need to be added to the bones” of what has already been announced, but with a massive majority, the Labour Party can afford to be as radical as it wants, even if that means upsetting several of its members who will face questions in the constituencies over the Party’s green agenda.

The Bank of England will face pressure to cut rates as soon as the start of next month if the headline rate of inflation, due for publication on Wednesday, is unchanged at 2%. It will be tough for Andrew Bailey to justify a further pause given the boost a cut would provide to the economy.

Last week, Sterling reached its highest level in a year, climbing to 1.2990 and closing at 1,2987 as market extensions of a rate cut in the U.S. grew.

As well as inflation data, the June employment report is due to be released this week. Wage data will be of particular interest to the Bank.

The prospect of a rate cut by the Federal Reserve was greatly enhanced by the publication of the June inflation data, which was released on Thursday.

Headline inflation fell to 3%, prompting Chicago Fed President, Austan Goolsbee to comment that “the data helped build his confidence that the level of price increases is headed back to an annual rate of 2%”.

He went on to say that the economy is no longer overheating, and the employment market is cooling but still strong, finishing by saying that he believes that “this is what the path to 2% inflation looks like”.

In his semi-annual testimony to Congress last week, Fed Chair, Jerome Powell, noted that inflation had improved considerably since reaching a four-decade-high two years ago. However, Fed policymakers still want to see more progress before cutting interest rates, though they are also carefully monitoring the jobs market.

Second-quarter job growth cooled from the first quarter but remains “buoyant.” Market commentators believe that the numbers that have been seen over the past couple of months are what they were expecting to see in January.

For this reason, rate cut expectations have been delayed but not shelved completely. The outcome of the past two FOMC meetings had led the market to accept that there may only be one rate cut this year and that would happen in December.

However, the data, which Powell says that the FOMC is driven by, has begun to soften even though wage increases are still such that “job hopping” is still prevalent.

The FOMC will meet in two weeks, and it is questionable if they will want to gamble on the July jobs figures, which they won’t have had sight of before deciding on a rate cut.

Following the July meeting, the FOMC won’t meet again until Mid-September, when a rate cut will be all but certain provided there are no shocks to the economy before that.

The dollar index has reacted to the expectation that the Fed may be forced to cut rates and not be afforded the luxury of loosening monetary policy according to its agenda.

Last week, the index fell to a low of 104.04 and closed at 104.09.

Provided it stays above the 103.80 level, the recent can still be considered a correction, but a significant breach of that level may well be considered a downward trend targeting 101.20.

Recent events in the U.S. that may well lead to the Fed cutting rates for the first time in close fifty-four months have confirmed recent statements from ECB President Christine Lagarde and her colleagues on the Bank’s Governing Council that having cut rates already, they are unlikely to fall too far out of step with the U.S. Central Bank.

This was a bold claim since when it was made, there was still a hawkish bias to the Fed’s comments.

It is still open to question whether wage settlements will have settled down sufficiently for a cut to be agreed to at the next meeting. So far, there have been mixed comments from ECB officials about their expectations.

Italian Central Bank Governor, Fabio Panetta, spoke last week about his view that the ECB could continue to gradually cut rates without harming the economy’s current positive inflation position.

The reduction of official rates can proceed gradually, accompanying the return of inflation towards the objective, if macroeconomic trends remain in line with the ECB’s expectations Panetta commented.

However, more hawkish ECB officials were less convinced, wanting to have the reassurance of physical data to allow them to be more confident about the path of inflation.

Isabel Schnabel spoke of her confidence that the path for interest rates in the U.S. and the Eurozone won’t differ greatly over the next year. “The macroeconomy is not all that similar. But on the inflation side, it doesn’t look all that different.”

France is still facing political turbulence as the country gets used to having a radically left-wing Government. If Jon-Luc Melenchon’s hard-left LFI Party succeeds in punching through its agenda of a 90% tax on earnings above Eur 400k per annum and reducing the retirement age to 60, it will have a significant effect on the French economy.

It is doubtful that Marine Le Pen’s right-wing National Rally and Emmanuel Macron’s Centrist Renaissance can mount a joint bid to ensure that Melenchon is thwarted in Parliament.

The Euro has continued to rally, indicating that the market considers a rate cut in the U.S. as more likely than a further cut in the Eurozone.

The common currency rallied to a high of 1.0911 last week and closed at 1.0907.

German retail sales data is due for release this morning and is expected to show a year-on-year fall of 0.6%. This will continue to show the weakness of the German economy.

Later in the week, the influential ZEW surveys for both Germany and the wider Eurozone will be published, and they too are expected to show the urgent need for a further rate cut.

Have a great day!