20 August 2024: Will Taylor be a Hawk or a Dove?

The GDP growth rate of 1.3%, predicted for the economy in 2025, is stronger than expected for either the U.S. or the Eurozone.

As the Government continues to prescribe “sackcloth and ashes” ahead of the Autumn budget which is now less than two months away, the reality is that the economy is “jogging along” quite comfortably and the threatened tax rises in the Budget may not be as necessary as Chancellor Rachel Reeves believes.

The economy’s relative strength should, at least for now, be considered an inherited boost and not a vote of confidence in Labour’s policies.

The new Government has been busy settling pay disputes, having settled the long-running demands of nurses, junior doctors, teachers and railway workers.

Who knew that all it would take was “deep pockets” and a gentle push from the trade unions who are, after all, the Government’s largest donors to achieve harmony?

During the election campaign, it may be that even Rishi Sunak was unaware of the plans of Starmer and Reeves to settle these long-standing disputes, which will almost certainly require taxes to rise, which he predicted and was shouted down in several debates.

Inflation is finally under control, despite the marginal rise that was seen in July.

The MPC may or may not cut interest rates at its meeting next month, but even the thought that a cut may happen is a significant departure from where the Bank of England was three or four months ago.

Looking back to the March meeting, the vote was 7-2 in favour of keeping rates unchanged, with the two dissenting voices calling for a loosening of monetary policy.

The attempt at profligacy at taxpayers’ expense may not even work. GPs are discussing their version of “working to rule”, while there have already been plans announced for weekend strikes on the London to Edinburgh train service.

While Sunak and Hunt stoked fears of higher taxes, the unions were hiding in plain sight.

The BOE is sceptical that the current pace of growth can last, noting that business surveys suggested that the underlying pace of the economy was weaker than the GDP figures indicate.

It all adds up to a messy final quarter of the year, with inflation rising and growth moderating.

The MPC has meetings scheduled for September 19th, November 7th and December 19th.

The vote will be close at every meeting between now and the end of the year. The new member of the Committee, Alan Taylor, will likely find himself in high demand as market participants and commentators try to decide if he is a hawk or a dove.

The pound looks set to challenge the 1.30 level versus the dollar, although a low will depend on the comments made at this week’s Jackson Hole Symposium.

The jury is out on whether the Fed will agree to a rate cut at next month’s FOMC meeting, and given Jerome Powell’s hawkish demeanour, a further delay is entirely possible particularly since there are no members of the rate-setting committee openly confirming that they will vote for a rate cut.

Sterling rose to a high of 1.2997 and closed at 1.2990 yesterday.

There has been a lot said about the policies of current Vice President Kamala Harris since she became the preferred candidate of the Democrat Party to fight November’s Presidential Election.

In a nation in which both the main Parties would be considered right of centre anywhere else, it is odd for an outsider to see and hear Democrats called Socialists.

Nonetheless, Donald Trump is expected to “draw some of the fire” from Harris’s confirmation as the official Democrat Candidate at this week’s Convention by returning to the fray, in what he expects to be the crucial final 90 days of campaigning.

Although he has been attending rallies across the length and breadth of the country, his bluster is still unchanged, but it is policy commitments that the floating voters who will decide the election and not pledges to “Make America Great Again”, want to hear.

Former President Donald Trump is countering the kick-off of the Democratic National Convention, and Vice President Kamala Harris’ recently unveiled economic agenda, by laying out his plan to boost the U.S. economy, the Republican’s campaign revealed yesterday.

It has been several months in the making, but short of cutting the budget deficit and threatening its NATO partners with cuts to its contribution, it will be interesting to find what his economic advisers have come up with.

Trump will announce a plan to unleash American energy and lower costs for American families.

Net zero has never been part of Trump’s plan, and he is likely to criticize India and China for paying lip service to carbon emission reduction while still polluting the atmosphere.

The introduction of tariffs of up to 38% on imported goods has been mooted for some time, and it is expected that Trump will “wheel out” plans from his 2019 campaign to drag back manufacturing capacity from Asia.

He will ignore the added costs, banking on the loyalty and patriotism of Americans to save the day.

The dollar index lost more ground yesterday as the market is coming round to the idea that the Fed will cut rates next month.

It broke the 102 level for the first time since early January, falling to 101.865 and closing at 101.86.

This week will see the publication of Purchasing Managers Indexes for the Eurozone. Some, but by no means a majority, of Market participants believe that this data will go a long way to cementing a rate cut at the ECB’s next Governing Council Meeting.

It is more likely that this is merely market commenters’ desperation for something to report, as many Council members are still on holiday for another week.

The ECB has been consistent over the past year in ignoring any data that does not directly involve inflation, and the PMIs are no different.

As long ago as January, wage data was considered to be the most significant piece of data outside the actual inflation figures. Wages were the last remaining barrier to the beginning of a cycle of rate cuts that would stimulate the economy.

Now, here we are about to enter the final month of the third quarter, with just one rate cut to quell the “desperate need” for economic stimulus.

Energy prices are set to soar from the start of October, providing those with dovish inclinations concern about whether the ECB hawks will vote for a further cut this year.

It is considered certain that the FOMC will be able to cut rates once or twice before year-end, while it is by no means certain that the ECB will cut again.

This is providing the Euro with an unexpected boost but as usual, with the Eurozone, its “castle is built on sand”.

Although monetary policy expectations create short-term volatility, they are merely expectations, and it is hard and fast growth and output numbers that indicate economic strength.

If the market believes that it will be output data, due this week, that will drive the ECB it is likely to be disappointed.

The Euro is “stretching its elasticity” to breaking point by continually rallying on the back of a divergence of monetary policy, and it is now reaching a crucial point.

The current lack of liquidity coupled with the age-old maxim of not standing in the way of a moving train is allowing the single currency to reach unexpected levels.

Yesterday it rose to a high of 1.1086 and closed at 1.1085.

The next point of resistance is set at 1.1160, although there are sure to be sellers emerging before it reaches that point.

Have a great day!