23 September 2024: The City believes that Labour’s “doom and gloom” warnings are driving foreign investment away

The Labour Government has not been in situ for three months yet, but it is getting a far rougher ride than could have been predicted when it stormed to victory in the General Election.

Any thoughts of Keir Starmer lowering his expectations for a painful experience when Rachel Reeves delivers her first budget at the end of next month have been dashed given the August data published by the Office for Budget Responsibility last week, which showed that the country’s borrowing rose to more than 100% of GDP for the first time since the Sixties.

The Chief Secretary to the Treasury said the August borrowing was the highest on record outside the Pandemic.

Rachel Reeves is expected to tell the Labour Party Conference, which is being held this week, that better times are guaranteed if tough decisions are taken now.

The Royal Economic Society, whose members advise several large UK conglomerates, say that the current environment does not augur well for the UK attracting foreign investment.

Next month, Reeves will speak at a conference, at which she is expected to encourage overseas investment and underline fiscal stability, which will be highlighted by a “responsible” budget.

The Financial Times reports that dysfunction in the post-Brexit border system is prompting many UK plant and food traders to try to set up their own “control points” where products can be inspected, as an alternative to state-run facilities.

There is an apparent bottleneck in Government-run facilities, which are reducing the time that major supermarkets can display fresh products.

The trusted trader programme, also known as the Authorised Operator Status, has been designed to evaluate the possibility of allowing regular importers to conduct checks at their own sites, rather than at a border control post.

Many economists are wondering why the Bank of England decided to leave rates unchanged last week, as other G7 Central Banks have embarked on a programme of rate cuts. Andrew Bailey was criticized following his “slow and steady” programme of rate hikes, which are believed to allow inflation to rise almost unchecked.

Following last week’s MPC meeting, Bailey told reporters that “it’s vital that inflation stays low, so we need to be careful not to cut too fast or by too much”.

However, analysts still expect a cut in November, providing a pre-Christmas boost to consumers and retailers.

The pound rallied to its highest level since February 2022 last week as it reacted to the growing gap between U.S. and UK interest rates. It reached 1.3340 and closed at 1.3323.

Given that J.P. Morgan had been predicting that the Fed would deliver a “jumbo” rate cut at some point this year, what happened last week has not been lost on its economics team, which celebrated being the only one of the major Wall Street banks to predict the FOMC’s actions. Although that is not strictly the case, when did Wall Street ever allow the facts to get in the way of a good bit of self-promotion?

Past actions do not predict what will happen in the future, and speculation has already begun about the outcome of the next meeting on November 7th.

Before that takes place, the Fed will have had two employment reports, the September inflation data and the small matter of the Presidential election to consider, so it is safe to say that speculation will continue for some time to come.

This week, a raft of economic data will be published, as well as speeches from regional Fed presidents and the Fed’s chairman.

The Fed’s favoured measure of inflation, Personal Consumption Expenditures, will be published on Friday, preceded by the final cut of Q2 GDP.

Austen Goolsbee, the Chicago Fed President, will speak later today. He is often the first FOMC member to give the Committee’s reasons for monetary policy decisions, so his speech will be eagerly awaited.

Following the FOMC’s decision to cut rates by fifty basis points, Treasury Secretary, Janet Yellen, told reporters that it is a “very positive” sign for the Economy.

Jerome Powell told reporters following the rate announcement that the labour market is in “solid condition” and the economy is in “good shape”. Yellen went further, saying that wages are rising faster than inflation which means workers are “getting ahead”, although risks of continuing high inflation are diminishing.

The longer-term question concerns the pace of rate cuts. Before the meeting, futures market traders, clearly influenced by J.P. Morgan, were convinced the Fed would move quickly.

CME reported a 12.8 percent chance that the federal funds rate target range would be 150 basis points lower by the end of the year; a 51.0 percent chance it would be at least 125 basis points lower; and an 88.2 percent chance it would be at least 100 basis points lower.

Powell denied that the Fed was playing catch-up with its 50-basis point rate cut. “We don’t think we’re behind. We think this is timely. But I think you can take this as a sign of our commitment not to get behind.” Nonetheless, Powell acknowledged that the Fed might have cut in July had the data come in before that meeting rather than just after.

The dollar index remained above its long-term support level following the rate cut. It fell to a low of 100.22 but rallied to close at 100.74.

Christine Lagarde is not currently regarded as a sage when it comes to predicting the future of the Eurozone economy. The market believes that the role is best left for Isabel Schnabel or Philip Lane.

Lane is the more pragmatic of the two, while Schnabel is a confirmed hawk, prepared to risk recession to control inflation.

Nonetheless, Lagarde is prepared to give her view on the economy and following the ECB’s decision to cut interest rates last week she spoke of her concern that the global economy is heading for a recession and an increase in volatility.

In a speech last week, she likened current conditions to the 1920s, when bad decisions and instability led to the great depression.

She believes that the effect of the pandemic, the global conflicts and the “ongoing” energy crisis have caused “significant” damage to supply chains.

She went on to warn that protectionism of the type threatened by Donald Trump should he win the Presidential Election and ironically being practised currently by the European Union towards Chinese-manufactured EVs and solar panels, would exacerbate the issues.

Despite her somewhat lukewarm attitude to Mario Draghi’s report, published last week, on the Union’s lack of competitiveness, Lagarde believes that the world is more able to accept structural change and that will be its saving grace.

Overall consumer confidence rose marginally in August, but the German economic sentiment data, as reported by the ZEW Institute, fell to its lowest level since May 2020.

The German Economy Minister, Robert Habeck, has spoken out against the closure of any manufacturing plants that are being considered by Volkswagen.

Habeck wants to support the car manufacturer to go ahead with cost-cutting without plant closures.

It seems that Volkswagen’s fate has become a cause célèbre in Germany, highlighting the difficulties being faced by the economy.

The German economy has been shrinking over the past two years and will remain stagnant for the rest of the year as it continues to grapple with economic malaise, Bloomberg reported on Friday.

Economists have already started downgrading their forecasts for this year, with some now seeing protracted stagnation or even another downturn.

The Bundesbank said last week in its monthly report that the German economy may already be in recession. According to the Central Bank, gross domestic product (GDP) “could stagnate or decline slightly again” in the third quarter, after a 0.1% contraction in the second quarter.

The euro has retained the strength it showed during the summer. This will have a positive effect on inflation but hit exports. The single currency rose to a high of 1.1189 last week and closed at 1.1163.

Have a great day!