24 July 2024: Wages are still a “stumbling block”

The Prime Minister dealt ruthlessly with seven of his Party’s MPs who defied the whip to vote with the SNP on an amendment to the Bill approving the King’s Speech.

The amendment was to do away with the two-child cap on benefit claims. The Conservatives voted with Labour to keep the cap in place.

Keir Starmer had said several times during the election campaign that he is in favour of removing the cap, but it is not a policy that can be afforded this year.

The Government won the vote comfortably but showed how strong Starmer’s grip on the Party has become.

The seven “rebels” including former Shadow Chancellor, John McConnell, have had the whip taken away from them for six months which means for that time they will be considered independent MPs.

The seven were allies of the Former Labour Leader, Jeremy Corbyn, who is sitting as an independent MP, having been removed from the Party for his stance on Labour’s support for continuing to provide weapons to Israel. He won his Islington seat at the Election, standing against the official Labour Candidate, with an increased majority.

Starmer will face several “irritants” like this as he continues to drive his party more into the centre of British politics and away from its traditional left-wing roots.

Accountancy firm EY published a report yesterday in which it predicted that the UK economy will grow by 1.1% this year. This is an increase from the 0.7% growth it had predicted at the end of the first quarter. It went on to predict that the UK would see 2% growth in 2025.

This is further encouragement of the Government, but the improvement cannot yet be laid at the feet of Chancellor Rachel Reeves but is a testament to Rishi Sunak’s claim that his policies were beginning to work when he mysteriously called the General Election for July 4th.

Today, the preliminary S&P Global/CIPS PMIs for June are due to be published. It is expected to show that both services and manufacturing grew last month to a level of 52.5 and 51.1 respectively from 52.1 and 50.9 in May.

This will have contributed to the composite PMI rising to 52.6 from 52.3 and shows that the economy is moving well away from the threat of a recession.

The Government’s ambitious growth target may suffer if the Bank of England can only cut interest rates once this year as the inflation rate begins to rise again in the Autumn.

The pound is in the doldrums as it awaits next week’s MPC meeting results. Yesterday, it fell to a low of 1.2887 and closed at 1.2907.

Jerome Powell is still unable to shake off his “lamb in sheep’s clothing” reputation as a member of the Republican Party fulfilling the role of Chairman of the Federal Reserve in a Democrat-led Administration.

Last week when testifying before the Senate Banking Committee, Powell faced now-familiar criticism from Senator Elizabeth Warren, who has been a constant thorn in his side since the Biden Administration came to power.

In her latest attack, Warren accused Powell of being “in the pocket” of the major Wall Street Financial Institutions, a charge which he vehemently denied.

There is no significant evidence of Powell favouring any part of the sector. Indeed, the support the Fed provided to the three regional banks that experienced difficulties last year is testimony to his overall approach.

Furthermore, Warren and many of her Democrat colleagues have accepted campaign contributions from Wall Street in the past, so this is little more than a case of “the pot calling the kettle black.”

The housing market showed, in data that was published yesterday, that it would benefit from the support provided by a cut in interest rates.

Existing home sales fell by 5.4% in June, down from a 0.7% fall in May. The housing market, along with the retail consumer, is a mainstay of the economy, and if that support begins to falter, the Fed may be faced with little of the time it believes it has available to wait until inflation falls closer to its 2% target before loosening monetary policy.

As well as PMI data, which is due for publication today, and is expected to show that output moderated slightly in June, new home sales are also due for release.

Tomorrow will see the publication of durable goods numbers as well as preliminary PCE data. The Fed’s “favourite” measure of inflation is expected to have fallen from 2.6% to 2.4% in June.

This will encourage those commentators who see the FMC voting for a cut in interest rates at its meeting next week.

The dollar index rose to the top of its recent range, driven primarily by commercial buyers, as investors are either on holiday already or waiting for the result of next week’s FOMC meeting.

The index rose to a high of 104.54 and closed at 104.44

The Eurozone’s financial institutions have failed yet again to take advantage of a period of relative calm in financial markets to repair their balance sheets, despite being given additional time by the ECB to account for the number of bad loans they are still carrying in their accounts.

Banks have been criticized for weaknesses in their cybersecurity in a report published by the ECB, which was timely given the problems witnessed globally last week which affected banks, as well as airlines, healthcare, and several other sectors.

Philip Lane, the ECB’s Chief Economist, whose “star” has been in the ascendancy recently, was scheduled to produce the opening address at an ECB-sponsored Conference yesterday but failed to deliver any clue on the Central Bank’s attitude to loosening monetary policy.

Today he will speak again on the topic of global growth, so may provide more on the Bank’s plans. He will be joined by the man he is believed to be about to replace as Vice President of the ECB, Luis de Guindos.

Data for consumer confidence was published yesterday and while it showed an improvement from -14 in May to -13 last month, it showed that consumers require the boost a further cut in interest rates would provide. Luxury purchases are becoming almost non-existent as homeowners continue to struggle to pay mortgages and utility bills have only fallen marginally.

The Governor of the Central Bank of Lithuania is unused to making headlines with his comments on monetary policy, but since the majority of his colleagues on the ECB’s Governing Council have now left for the summer holidays, it was left to Gediminas Simkus to give his interpretation of its intentions.

Simkus believed that the ECB would agree to two further cuts in rates this year, in September and December.

It is unclear whether that will be seen as sufficient to provide the much-needed boost to the economy since most economists polled recently see a full percentage point of cuts as being necessary.

The short-term fate of the Euro, in keeping with other G7 currencies, is currently completely in the hands of the three main Central Banks.

With The ECB having met last week and the Fed and Bank of England due to consider monetary policy next week, traders are left “sitting on their hands.”

Yesterday, the single currency lost ground versus the dollar. It fell to a low of 1.0843 and closed at 1.0853.

Have a great day!