13 June 2024: Banks are desperate to lend to homebuyers

GDP flatlined in April. This follows the encouraging signs from the first quarter that the economy had indeed “turned a corner”, which has become one of Rishi Sunak’s slogans during the election campaign.

It appears that Sunak is doomed to lose the election no matter what he does, and only the size of Labour’s majority is open to question.

From the moment he stepped out in a thunderstorm to announce that he had decided to call an election, to the accusations that he lied during the first leaders’ debate to his extraordinary early departure from the D-Day commemorations, Sunak has run an abysmal campaign so far.

Last evening, in the latest forum at which he and Sir Keir Starmer faced an audience of voters, he struggled to gain any traction as it seemed even those in the audience who were potentially minded to vote Conservative appeared to have lost faith.

In a poll, which took place immediately following the event, a 64:36 majority believed that Starmer had “won” the debate. As former ministers voice their concerns, it is now about damage limitation. Grant Shapps, Defence Minister in Sunak’s Cabinet, spoke yesterday of the prospect of a Labour “supermajority”, and former Attorney General, Sir Geoffrey Cox commented that the election could see the UK become a “one-party socialist state”.

The fact that growth would have been difficult under any circumstances given the atrocious weather in April, which was the wettest in twelve years affecting the construction, hospitality and retail sectors, sums up the desire in the country for change.

The next three weeks will be agonizing for Conservative supporters who see how close the Reform Party are to overtaking them and becoming the main opposition Party.

The four main mortgage lenders are “falling over themselves” to offer attractive deals to first-time buyers and those who are considering remortgaging as the Bank of England remains under pressure to cut interest rates.

It is considered unlikely that the rate of both inflation and wage growth will have moderated sufficiently to allow the Bank to cut rates before September.

The pound rallied against the dollar yesterday as the market’s overreaction to marginally softer inflation data in the U.S. saw it reach a high of 1.2860. It fell back to close at 1.2798 as the FOMC delivered a sense of reality to any consideration of an impending rate cut in the U.S.

Recent meetings of the FOMC have reflected the personality of Fed Chair Jerome Powell. It is doubtful that Powell even could spring a surprise if he wanted to.

The one significant takeaway from the latest FOMC meeting which concluded yesterday is that the dot plot, which provides a preview of the Committee’s member’s views on the number of rate cuts they expect this year and when the first cut will happen, showed that just one cut is expected and that it will take place in December.

The Fed is in the enviable position of being able to be patient, retaining its hawkish bias since growth, output and job creation are betraying the position the country is in at the current point in the economic cycle.

Job creation is leading to above-average wage demands, which are adding to allow inflation to only fall marginally, as was seen yesterday.

Year-on-year headline inflation was 3.3% in May, down from 3.4% in April, while core inflation also fell moderately from 3.6% to 3.4%.

Month-on-month, headline inflation was unchanged.

Given that changes to monetary policy are an incredibly blunt instrument with which to exercise any degree of control over the economy, the Fed is content to “sit on its hands” unless the economy takes a significant nosedive in the coming months.

The advance guidance that has been provided by Powell and his colleagues during the current quarter has been becoming ever more hawkish, which pointed to the outcome of yesterday’s meeting.

In his press conference, Powell spoke of his concern that the economic outlook is still uncertain and that growth and employment levels are unsustainable overall.

“These dynamics can continue as long as they continue,” Powell said. “We’ve got a good, strong labour market. We think we’ve been making progress toward the price stability goal. We’re asking if our policy stance is about right, and we think yes, it’s about right.”

While one cut is the policy for now, the FOMC left the door open to bring forward the first cut to allow it to cut twice should conditions change.

The dollar initially fell on publication of the May inflation report, as the market got a little ahead of itself about a cut in September. However, Powell injected a sense of reality about the current economic conditions, which allowed the dollar index to recover.

It fell to a low of 104.26 but recovered to close at 104.70.

Is the ECB regretting having cut interest rates last week just as inflation has begun to tick back up?

That may well be so, but having created such a furore about a June cut in rates that even the established hawks on the Governing Council were admitting that the time had come for a cut in rates, the Central Bank had painted itself into a corner.

There have been several comments made since the cut was made in the hope that the market will believe that the ECB is somewhere between “one and done” and autopilot, where a cut is seen following every meeting.

Christine Lagarde wanted to get to a position where cuts would take place at regular intervals, but the level of inflation has made that impractical if not impossible.

The more dovish Central Bankers on the Governing Council who were braying for rates to be cut represent those economies that have seen encouraging levels of growth since the start of the year, and it is the larger economies that would be best served by a series of cuts.

However, the hawks from Germany, Austria and Latvia are content to “go with the flow” for now.

A lot will depend on the inflation data over the next few months since if it were to fall closer to the ECB’s 2% target the clamour for another cut would return.

The ECB itself does predict that headline inflation will fall to 2% before the end of next year, so it is doubtful that the Eurozone economy will receive the boost it needs from looser monetary policy.

The thorny subject of loan loss provisions is rising to prominence again. At the height of the financial crisis, the ECB extended the time over which banks were able to provide for bad or doubtful loans. Unsecured loans must be fully covered within three years, but unsecured debt can be covered over seven.

Banks are dragging their feet in providing for secured loans, which is both frustrating and concerning the ECB. The problem is obvious, the Eurozone wants to ensure the fallout from the earlier downturn is fully dealt with before the next one hits.

The euro is now in a long-term downturn as divergence in monetary policy continues. However, its fall will not be linear, as the price action from yesterday showed.

The single currency rallied to a high of 1.0852 and closed at 1.0809.

Have a great day!