12 June 2024: The jobs market is strengthening

Yesterday’s publication of the Conservative Party Election Manifesto was full of style, but sadly lacking in inspiration. Holding the event at Silverstone racetrack provided plenty of opportunity for metaphors about the Party changing gears and being in poll position, but, unfortunately, the Tories seem to be stuck in the pits.

The event had the feel of a “last chance saloon” for Rishi Sunak.

The Manifesto itself had all the hallmarks of Sunak’s character. There are plenty of promises and vague expectations for future benefits. The suffering will continue in the short term with the hope of accruing benefits further down the road.

Sunak asks an awful lot when he asks the electorate to trust him and his party after fourteen years of broken promises.

No excitement was generated, just a lot more “stodge” and vague hopes.

A 2% cut in national insurance contributions in two stages and a promise that the self-employed rate would be cut to zero during the lifetime of the next Parliament were all he could deliver.

There was no mention of income tax or inheritance tax.

Following his admission that buying a home had become harder during the Conservative’s term in office, he announced a rise in the threshold for payment of Stamp Duty and there was also a vague mention of a new scheme for first-time buyers, with details to follow.

It is unlikely that this Manifesto will galvanize voters to have greater confidence to vote Conservative, and the election is still Labour’s to lose.

Sir Keir Starmer will announce His Party’s Manifesto tomorrow. Unless he has a significant “banana skin moment” Labour may well be “out of sight” by the weekend.

The May employment report was published yesterday. The claimant count rose to 50.4K and the overall unemployment rate rose marginally from 4.3% to 4.4%. The most meaningful data was average earnings.

These were unchanged at 6% and 5.9% when bonus payments were included.

This provides a “half glass full” situation for the Bank of England. Pessimistically, wage increases are still too high for the Bank to cut rates, but an optimist would point out that wages appear to have “topped out”.

Sterling managed to “hold its own” versus the dollar which has been galvanized by the strength of the U.S. economy. It fell to a low of 1.2705 but recovered to close at 1.2740.

The market will receive a “double whammy” of activity today, with the May inflation report due to be published early in the afternoon, followed by the latest FOMC meeting concluding in the early evening.

Both events should provide the dollar with further impetus to extend its recent gains.

Inflation is expected to have seen little change last month, with the headline rate remaining at 3.4%, while the core rate possibly “ticking down” from 3.6% to 3.5%.

Wage increases are still above the rate of inflation, which means that the FOMC will have no incentive to loosen monetary policy at this month’s meeting.

Most interest will be in the publication of the “dot plot” which shows FOMC member’s expectations for interest rates at the end of this year and next.

The market believes that a Fed Funds rate of 3.9% will prevail at the end of 2024 and fall further to 3.1% in 2025.

This will mark a significant fall from the current range of 5.25% to 5.50% despite the recent comments from FOMC members that patience will be needed before a rate cut can be delivered.

Some of the more hawkish commentators see the Fed only making a single cut this year or two at the most. The most dovish prediction is for three cuts to take place beginning in September.

Following more than two years of the most aggressive Federal Reserve monetary tightening in four decades, the major surprise is that the world hasn’t fallen over.

While US interest rates at 23-year highs are causing pockets of pain, there’s nothing like the systemic problems that so often wrecked economies in the past.

Financial markets continue to digest what Chair Jerome Powell calls “restrictive” policy very well. The three US regional bank failures of spring 2023 are most notable for how little they affected the economy and how quickly regulators were able to halt any contagion.

Jerome Powell finds himself in a relatively comfortable place right now. The expectations of a soft landing have mostly fallen away due to the stubbornness of inflation, but it has been proven that the economy is dealing better than had been expected with the elevated level of interest rates.

The divergence of monetary policy between the U.S. and the Eurozone has led to the predicted fall in the Euro, while the dollar index has seen a moderate improvement.

Yesterday, the index rose to a high of 105.46 and closed at 105.27.

ECB officials are “falling over themselves” in their efforts to convince the market that while the Bank has not agreed to a “one and done” interest rate cut, it will be a considerable time before the next cut takes place.

The ECB is concerned that the cut in rates it agreed last week may be followed by a continuation in above-inflation wage settlements and/or a rise in inflation.

It is unusual for the Central Bank to have to rely on “hope” but having “painted itself into a corner” it is left with little alternative.

Philip Lane, the former Governor of the Irish Central Bank, and current Chief Economist at the ECB spoke yesterday of the need for caution to be exercised when a further rate cut is being considered.

He believes that the European Central Bank should persist in restraining economic growth given the ample inflationary pressures and wait with its next rate cut until uncertainty recedes.

In a world of uncertainty, one way to deal with uncertainty is a little bit of waiting; wait and make sure you’re not taking a step you’re going to regret; Lane told an event in Dublin.

Christine Lagarde spoke earlier in the week that the market should not expect a rate cut every time the Governing Council meets, and it may be “a few” meetings before a further cut is announced.

It is odd that having just announced a loosening of monetary policy, the ECB has kept a “hawkish bias”.

Other Members of the Governing Council have also demanded caution.

Joachim Nagel, Robert Holzmann and Martins Kazaks want to see inflation “well on its way” to reaching the ECB’s 2% target. With the ECB’s official estimate being for inflation to only reach 2% in 2025, it may be a long wait before the next cut is confirmed.

The Euro is reacting to the political turmoil that has emerged following the Parliamentary elections that were held last weekend. Emmanuel Macron’s surprising call for a Presidential Election in France has not been well received.

The Single Currency plunged to a low of 1.0719 yesterday and closed at 1.0740. While it cannot be characterized as having “collapsed”, the Euro is on a clear downtrend.

Have a great day!