10 December 2024: Reeves vows to be ambitious in strengthening EU ties

Yesterday, Rachel Reeves became the first Chancellor to address the Eurogroup meeting of EU Finance Ministers since Brexit.

She suggested that it is “in our national interest to forge closer ties” and “normalize” our trading relationship.

The Labour Party is trying to thaw the relationship which has become “frozen” since the country voted to leave the European Union eight years ago.

Her remarks will fuel concerns among critics that the government is moving too close back into Brussels orbit. Both the Conservative and Reform Parties are calling for the UK to forge a closer relationship with U.S. President-Elect Donald Trump.

The Shadow Business Minister, Andrew Griffith, said that if Reeves is looking for growth she should tell the Prime Minister to jump on a plane to the US and talk to Trump about getting a US-UK trade deal done, and not to take Britain backwards into the slow-growth EU.

The EU is failing on many levels, but irrespective, it has more than three hundred million potential customers for British goods and services.

Suppose Reeves and her colleagues in the Cabinet can build a working relationship with Brussels, which will allow access to its markets while avoiding red tape and bureaucracy. In that case, she will go a long way towards seeing real and sustainable economic growth.

Conversations about the reset will begin in the new year,” Reeves told reporters after addressing the Eurogroup. “I recognize that the deal that the previous government secured post-Brexit was not the best one for our country.”

Reeves was being more than a little disingenuous to the previous Government since they were left with little choice but to decide on whether to leave the EU to the country and then had to make the best of that decision while facing significant opposition from Brussels.

Labour’s leadership at the time were content to “sit on their hands” while the Conservatives came close to destroying itself from within.

The situation is not dissimilar to current Health Secretary Wes Streeting conveniently forgetting the damage caused to the NHS by the Pandemic.

The Prime Minister is on a tour of the Middle East trying to drum up investment for “UK Inc.”

He arrived in Riyadh yesterday and told reporters that he would put the economy before any conversations about his host’s human rights violations.

Sir Keir Starmer said that he wanted people to feel better off, so “we have to win contracts and investment around the world”, and recent deals with Saudi Arabia have “yielded” 4,000 jobs to the UK.

The Prime Minister accused predecessor Boris Johnson of “going cap in hand from dictator to dictator” when the former PM met Saudi Arabia’s Crown Prince Mohammed bin Salman in 2022.

Former Downing Street spin doctor, Alastair Campbell, told the BBC last week that being in government is “different” to being in opposition”. Starmer has proved that point several times in the past six months.

The pound lost ground against the dollar yesterday as hopes for a rate cut from the FOMC faded, although it resumed its climb versus the Euro.

Against the dollar, it fell to a low of 1.2717 but recovered to close at 1.2748. Versus the single currency, it climbed to a high of 1.2094 and closed at 1.2084.

This week’s publication of the data for consumer prices is expected to confirm finally that there will be no “festive rate cut” agreed by the FOMC.

Although the news blackout has started, FOMC members have left their audience(s) in little doubt of their intention to see monetary policy loosened but will not be in any hurry while inflation stays above their 2% target.

The data, due for publication tomorrow, is predicted to see the headline rate of inflation rise to 2.7% year-on-year, while the core rate which excludes energy and foodstuffs remains “stuck” at 3.3%.

Housing-related expenses are still a critical focus, as they have been a significant driver of core inflation throughout 2024, while persistent inflation in services continues to concern policymakers, with wage pressures likely to keep prices elevated.

Last week’s publication of employment data for November showed that wage growth is still at 4% annually, while it continues to grow at 0.4% monthly.

There has been significant conversation recently about whether the U.S. economy is on another major “growth spurt” while some economists are concerned that the level of growth that is due to hi-tech investment around Artificial Intelligence, is yet another bubble about to burst.

Those who believe in economic cycles believe that the country is due for another major event that will act as a “reset” on the economy.

The Election of Donald Trump as President is expected to allay those fears while his “honeymoon period” lasts, but borrowing is still on an unsustainable path and China’s reaction to the addition of tariffs to its exports to the U.S. is a major imponderable, since their willingness to fund the U.S. budget deficit may be open to question.

Market fears that Jerome Powell may be relieved of his duties as Chairman of the Federal Reserve have lessened since President-elect Trump has said he will not try to replace Federal Reserve Chair Jerome Powell and will let the Central Bank Chief finish his current term that runs until May 2026.

In an interview on the television show “Meet the Press,” Trump said he has no plans to cut Powell’s tenure short at the Central Bank. “I don’t see it,” Trump said when asked if he’ll try and remove Powell from the Fed.

The dollar is coming close to the level that the market expects at year-end. With the divergence between monetary policy between the U.S. and Europe expected to widen, any reaction is already priced in.

Yesterday, the dollar index rallied to a high of 106.21 and closed at 106.16.

The final G7 Monetary policy decision of the year is still whether the ECB decides to cut rates by twenty-five or fifty basis points, although the Bank of Japan may well hike rates this month, since the Japanese economy is a law unto itself.

Twenty-five points are already priced in, but there is a significant basis in favour of making a genuine statement of concern over the state of the Eurozone economy.

Interest rate markets still believe that the Hawks will prevail, and a twenty-five-point cut will be agreed upon.

Investor confidence fell to its lowest level for thirteen months according to data published yesterday. While consumer confidence is showing signs of marginal improvement as inflation has fallen, that has not spread to investors as political turmoil in Germany and France is coupled with disappointing data from the region.

The Sentix investor confidence index for the Eurozone fell to -17.5 from -12.8 in November. This was the lowest value since November 2023. The current situation as well as expectations declined in December. Assessment of the current situation reached its weakest level since November 2022.

At -28.5, the current situation index plummeted into the deep red from a three-month high of -21.5 in November. At the same time, the expectations index fell to -5.8 from -3.8 a month ago.

The survey indicates that a recession is increasingly becoming an issue for the region, especially as the six-month expectations provided no cause for hope.

Even before the French and German governments collapsed, Europe’s economy had enough difficulties. Tepid growth and lagging competitiveness versus the U.S. and China. An auto industry that’s struggling.

Solutions will be harder to find while the two countries that makeup almost half of the eurozone economy remain stuck in political paralysis well into 2025.

Where once there was the so-called French German axis to push Europe ahead, now there’s a vacuum.

French Prime Minister Michel Barnier resigned last week after losing a vote of confidence, and while President Emmanuel Macron will appoint a successor, the new head of government will lack a majority. Elections are not constitutionally permitted until at least June.

The French economy is now being effectively managed by the opposition parties, who are unable to agree on the path ahead.

The hard left has called for Emmanuel Macron to resign while the largest opposition group, National Rally run by Marine Le Pen, wants reform and sees an opportunity to become the largest party in Parliament if it can be patient.

The rest of the Union is being suspended in limbo, unable to move ahead with the reforms recently suggested by Mario Draghi until the political situation becomes clearer.

The euro continues to struggle. It fell to a low of 1.0532 yesterday and closed at 1.0550. With a twenty-five-point cut priced in, little reaction is expected, but should the ECB agree on a fifty-point cut the Euro could begin its journey towards parity with the dollar.

Have a great day!