Second Ballot confirms Johnson’s lead

Yesterday’s second leadership ballot by Conservative MPs cemented Boris Johnson’s position as the favourite to succeed Theresa May as Prime Minister. There is a third ballot today as stage one of the process concludes.

Later in the day, a relatively subdued Johnson looked on as his four remaining rivals battled to prove their credentials in a televised debate. It is hard to say who gained most and conversely who lost ground following the debate. The candidate who gained most in the second debate, Rory Stewart, may have done himself no favours by insisting that under his stewardship the UK would never leave the EU with no-deal.

One more candidate will drop out of the race following today’s ballot with the final two to be confirmed tomorrow.

Inflation data released later this morning is likely to provide some relief to the Bank of England which meets tomorrow for its monthly monetary policy committee meeting.

It is widely predicted that consumer prices will have dropped back from 2.1% in April to 2% in May. The BoE is hoping for a calm summer although any further weakness in the pound will add to inflation. Governor Mark Carney is hoping to ensure that he and his colleagues have as many weapons as possible available as the unpredictable effect of however the UK leaves the EU takes hold.

Yesterday, the pound fell to a low of 1.2506 versus the dollar but managed to rally late in the day closing at 1.2557. It rallied from a low of 1.1142 versus the single currency, to close at 1.1217.

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Draghi attracts the “Wrath of Trump”

ECB President Mario Draghi in a speech which was even more dovish than usual, and certainly more so than the market had expected said that the Central Bank will ease monetary policy again should inflation fail to accelerate.

With price rises very much in the slow lane, it seems that Draghi was providing his clearest advance guidance yet that the time has come for action. His words sent the Euro tumbling and attracted the attention of President Trump who accused the ECB of artificially weakening its currency.

While it is true that the ECB will do all it can to stimulate exports which are the lifeblood of the Eurozone economy, there is nothing artificial about the slowdown which is engulfing the region and could still turn into full-blown a recession.

With just four months of his eight-year term left and potential replacements gathering, Draghi, speaking at the ECB’s annual conference in Sintra Portugal, spoke of the need to be as flexible as possible within its mandate to create the conditions for a return to sustainable growth.

President Trump leapt upon Sr. Draghi’s comments, saying that along with China and others, the Eurozone had been getting away with it (an artificially weak currency) for years.

There was one familiar message from Draghi’s words. The ECB will continue to study the effect of any change in policy over the next few weeks meaning that they won’t be rushed even as the slowdown continues.

The single currency retreated versus the dollar yesterday reaching a low of 1.1181, closing at 1.1193.

Powell to provide rate guidance

While the President’s gaze was focused across the Atlantic, Fed Chairman Jerome Powell has been preparing to comply with one of his demands of the Federal Reserve: a rate cut.

Trump has been vehement in his criticism of Powell’s performance as Chairman of the Federal Reserve and will almost certainly take credit should the Central Bank cut rates in the coming weeks or months.

Had the FOMC not hiked last year, the economy probably would have overheated with inflation ending up well above target. So, on balance, the Fed’s decision was most likely correct although the third hike was overkill.

It is almost impossible not to overshoot when trying to guide such a large and diverse economy when it is compared to other countries with issues of their own. Given the link between economies as global trade, despite its current issues, becomes ever more prevalent, it is impossible to “buck the trend” and grow while others struggle.

At its last meeting, Powell commented that the FOMC would be patient and remain vigilant about the pace of growth in the U.S. economy. It would be odd if he then changed his rhetoric at this meeting since the pace of change in the economy hasn’t altered that much.

When looking at data longer term the three-month average of job growth is around 185k which is in line with expectations So, despite last month’s significantly weaker than expected number, the economy is still producing jobs at the required rate overall.

Should Powell be anything less than dovish at the press conference later, the dollar is likely to climb significantly. However, should he break with his data-driven approach and provide some advance guidance on rate cuts then the opposite will happen.

At today’s meeting, the Fed will give its quarterly economic forecasts, and these may be more informative than the words of Jerome Powell.

The dollar index rose yesterday following Sr Draghi’s speech reaching a high of 97.77 and closing at 97.65.