16 July 2024: An economic boost is coming home, even if Football isn’t

Before the General Election, several economists and market commentators commented that the new government would not only benefit from a “honeymoon period” in which it would be given time to “bed in” before being subjected to significant scrutiny but would benefit from a “windfall” of “good news stories”, which would allow it to “hit the ground running”.

So it is being proved with the recent series of concerts by pop superstar Taylor Swift raising over a billion pounds for the UK economy. Despite England’s capitulation to Spain in the final of Euro 24, the economy will benefit a further £3 billion.

These extra funds will provide Rachel Reeves with a little “wiggle room” as she begins to try to drive the economy forward and create levels of growth that have not been seen since the Pandemic.

The King will preside over the State Opening of Parliament later this week, and the Prime Minister has said recently that his Government will introduce a series of Bills that will illustrate his commitment to change and public service.

Law and order was another topic which had concerned voters at the election, and there has been some concern over the new policy of allowing prisoners serving less than four years to be let out of prison having served only 40% of their sentence. Further measures are likely to be introduced in this area, as well as proposals to deal with the influx of undocumented immigrants arriving in small boats from France.

However, the King’s Speech is set to be dominated by measures to boost growth and raise levels of productivity and output that were the lowest in the G7 last year.

Reeves has been urged to simplify personal investment products that should provide a boost to savings. A ‘radical ISA simplification’ could, with further reforms, create ‘the foundations for an investing revolution, benefiting individuals and the wider economy’ was the comment of one fund manager.

There is concern that changes are being considered to the state pension that will see it considered a benefit, rather than a right if this happens, Starmer is likely to face his first major challenge with demands about why this wasn’t mentioned in the Labour Party’s election manifesto.

Swati Dhingra, the most dovish member of the Bank of England’s Monetary Policy Committee, has been voting for rates to be cut since February.

Yesterday, she made a speech in which she remarked “I don’t see some kind of consumption boom, and if we are going to start moderating from the very high level of interest rate where we are now at 5.25% it is going to take some time for that to happen.

Dhingra also highlighted the steady decline in consumer price inflation, stating, “What we’ve already seen is that consumer price inflation has been in a very firm downward trajectory.”

The MPC meeting on August 1st is considered to be 50:50 regarding a rate cut.

The recent strength of Sterling ran out of steam yesterday just short of the psychologically important 1.30 level. It fell to a low of 1.2961 and closed at 1.2973.

Jerome Powell spoke to reporters yesterday following his testimony before Congress last week, and his time was noticeably less hawkish on interest rate cuts than it has been for some considerable time.

Without actually using the words, Powell has changed his bias regarding the economy from concern over inflation to promoting growth.

He spoke for some time of his pride that the Fed was able to contribute to the economic recovery following the pandemic.

He said that at the time he and other members of the FOMC were concerned that they would see “rampant” inflation, but believed that, with the market showing concerns of a 1930s-style depression, it was the right move to leave interest rates alone until a recovery was seen even though consumption was “going through the roof”.

Faced with that kind of challenge, it would take some time and some radical action to “steady the ship,” but with rate cuts likely to begin in the next two quarters, he is confident that the Central Bank can fulfil its dual mandate.

He pointed out that the FOMC may not need to wait until the headline rate of inflation reaches its 2% target for cuts to begin.

Other members of the rate-setting committee are scheduled to speak this week, and it is considered unlikely that they will contradict Powell’s comments.

The Fed is concerned about a slowdown in economic activity since Powell’s comments follow disappointing inflation data for June. Having resisted calls for rates to be cut for several months, Powell believes that the time is right to ease monetary policy.

In typically conservative fashion, he may wait for one more meeting to see the July employment and wages data before “pushing the button.”

The dollar index bounced off support at 104.00 yesterday, climbing to a high of 104.32 before closing at 104.27.

Politics is not usually a consideration when G7 Central Banks consider changes to monetary policy, and it is generally considered that every meeting takes place in unusual circumstances.

The meeting of the ECB’s Governing Council which takes place on Thursday is no exception, with the rate cut agreed at the last meeting still causing some concern among the more hawkish members.

Having acceded to the desire of several members to cut rates, against their better judgement, the Hawks will need to be one hundred convinced that they are not going to witness a “flare up” in inflation before agreeing to a cut this week.

Since the Committee last met, there has been a significant political shift in France that is causing concern across the entire Eurozone. Having been prepared for a major shift to the right in France which, economically, may have been acceptable, the country witnessed some political “horse-trading” which put the far left in control.

It may well be that the ECB if Jean-Luc Mélenchon’s proposals regarding tax and pension age are adopted before considering monetary policy.

Following this week’s meeting, most of the Governing Council will be leaving for their annual holidays, which will allow the situation to settle before it meets again in mid-September.

ECB President, Christine Lagarde, is considered a consummate politician, adept at keeping both the Doves and Hawks on the Governing Council “almost” satisfied. However, it is her Chief Economist, former Governor of the Irish Central Bank, Philip Lane, who has his finger more closely on the pulse of the economy.

Only 40 per cent of respondents in a Bloomberg survey said the ECB president was among the top two executive board members they follow to inform their opinions.

Isabel Schnabel the German economist responsible for the ECB’s bond portfolio and Lane are the most listened to members. While Schnabel is reckoned to have a “typically German” attitude to monetary policy, Lane is believed to “tell it like it is.”

The Euro finally ran out of steam just short of its medium-term objective of 1.0920 yesterday. It is unlikely to attempt to breach that level before the result of Thursday’s meeting is known.

It fell to a low of 1.0883 and closed at 1.0984.

Have a great day!