14 August 2024: Wage increases fell more than predicted last month

Brexit has largely fallen off the radars of most in the EU and UK. At last, that was true until the Labour victory at the recent General Election.

The Socialists have had a curious relationship with Brexit, not being able to make their minds up if they were in favour of the country’s departure from the European Union or not, even though they were in the envious position of being able to observe Boris Johnson’s struggles with Brussels from relative comfort.

Starmer confidently suggested that he would renegotiate the agreement that Rishi Sunak made with Brussels, suggesting that it would be better for both sides.

What he did not expect was the indifference from the European Union to having the UK “back in the fold”, in “some form” or another, and will play “hardball” in any negotiations.

It is not the fact of the UK not being welcome, it is the disruption that its departure caused that will encourage Ursula von der Leyen to wish to extract her “pound of flesh”.

EU officials are of the view the ball is firmly in the UK’s court and that any wide-ranging political reset might not be attractive given the compromises it would entail.

Neither are they optimistic about the UK’s progress on rolling out new customs checks on high-risk EU (including Irish) exports, which have been delayed multiple times over the last number of years and are due to be stepped up in October.

There is a big question mark over whether the UK will be ready, according to EU officials. And while that might be good for Irish traders, it means fewer onerous checks on plant and animal products at UK west coast ports, it is frustrating for those that just want certainty on costs and logistics.

This is another example, there have been a few since the election of the new Government believing that their victory and large majority will see several issues simply fall into place, and it will need to put in a great deal of work to get the country back to high growth and productivity, coupled with low inflation.

Questions continue to be asked in the City about the veracity of Rachel Reeves’s recent statement to the House of Commons about the state of the economy that she inherited.

Figures out yesterday showed unemployment falling and wage growth stabilizing, raising hopes of another interest rate cut.

The pound hit a twelve-month-high last month, although that was mostly due to concerns about an expected bout of weakness for the U.S. economy, which could lead to a series of rate cuts by the Federal Reserve.

Today’s publication of inflation data will see a slight rise in prices that has been expected since inflation reached the Bank of England’s 2% target in the two preceding months. That may cause some doubt about another rate cut being agreed next month and cause further strength for the pound.

Yesterday, Sterling rallied strongly, reaching a high of 1.2873, and closing at 1.2862 as a rate cut in the U.S. next month became even more certain.

It seems an exceptionally long time since the hopes of a soft landing for the U.S. economy were first mentioned.

It seems that for most of this year, the economy has been on the cusp of reaching that fabled point. The problem is that no one, least of all, Jerome Powell wants to be the one to declare one since it is impossible to agree exactly what a soft landing would look like.

One UK bank’s economics team believe that today’s publication of the June CPI data will be less important than it has been of late since it is apparent that inflation is gradually “falling into line”, even if it is still “some way” from the Fed’s target of 2%.

Something that has become of greater importance over the past eighteen months is the two-tier data for inflation that shows price increases including food and energy prices and those volatile items excluded.

Many economists fail to understand why items that have caused inflation to climb to such elevated levels should be excluded.

The recent fall in the U.S. equity market is an overreaction since the economy is a “long way” from slipping into recession and, in any case, the Fed has “plenty in reserve” to ensure that doesn’t happen.

It has slipped the notice of those who consider a rate cut next month as a certainty that the Fed has never cut rates when the economy is exhibiting significant growth.

Many observers cite the fall in the number of jobs that were created in July as a reason for a rate cut, but having seen 100k+ new jobs created, no one can seriously consider that the data has turned recessionary, particularly since it complies with what the FOMC is trying to achieve.

Volatility has returned earlier than usual this year due to a particular set of circumstances, including the Presidential Election, the concerns over an all-out war in the Middle East, and the way asset markets now appear to be controlled by the share price of an extremely narrow group of stocks that make it susceptible to any downturn in that sector.

The dollar index reacted poorly to yesterday’s data releases which showed that the economy is slowing, even though some would say that is just another sign of an eventual soft landing.

It fell to a low of 102.55 and closed at 102.61 although there is expected to be significant buying interest around this level.

Ever since the Eurozone came into being, it has been said that its economy is two-paced.

Originally that was because it was the coming together of two distinct groups, one of which was used to continued growth and moderate inflation, while the other was more used to “boom-bust” economics in which high rates and high inflation were the norm.

Latterly, the Eurozone economy has remained two-paced, but its makeup has changed out of all recognition.

At the time when interest rates first reached their zenith, countries like Italy, Spain and Greece were braying for the rate rises to end and as soon as they did, were calling for the rate cut which took almost a year to come to fruition.

Now, the Central Bank Governors from those countries are silent as their economies have begun to flourish as inflation has fallen, and they bask in a “post-pandemic glow”.

It is now the nations of the north, like Germany, France and Belgium that are suffering since, particularly in the case of Germany, they “shouldered the burden” of high energy prices.

France is and always has been a “one-off”, in that it is extremely volatile politically while Belgium and to a large extent The Netherlands are, economically< a mirror image of Germany. Yesterday, the influential ZEW index of investor sentiment was published in Germany and the wider Eurozone. It showed that investor confidence has plummeted. In Germany, the current situation fell to -77.3 from -68.9, while future expectations also fell to 19.2 from 41.8. The situation in the Eurozone as a whole is equally dire, with economic sentiment falling to 17.9 from 43.7. These are the lowest numbers since January. The situation in Germany stems from fears of a global slowdown. Deteriorating economic hopes for the eurozone, U.S. and China meant the sentiment for export-intensive sectors, a key driver of Germany’s economy, declined. Despite the poor data, the Euro managed to rally, since it is currently driven by contrasting expectations for a loosening of monetary policy. It reached a high of 1.0997 and closed at 1.0993. Its rally took out sell orders around the 1.0960/80 level, but it is unlikely to extend its gains much above 1.1020, although, given the current lack of liquidity, it may well trigger stop losses that are placed just above the sell orders.

Have a great day!