24 September 2024: The Chancellor promises that sacrifices will be “worth it”

There was outrage from many delegates at the Labour Party Conference yesterday. The Party’s executive postponed a vote on the Winter Fuel Payment to Pensioners until Wednesday, when many attendees, including the Prime Minister, will have already left.

Keir Starmer is attending the United Nations General Assembly in New York. The Assembly will be discussing the ongoing conflict in Ukraine, as well as the escalation of Israel’s invasion of Gaza into Lebanon.

At yesterday’s session, Chancellor of the Exchequer, Rachel Reeves cut a far more positive and upbeat figure promising that sacrifices made now will lead to significant benefits down the road. She promised that there would be no return to austerity. Since she was “preaching to the converted”, her remarks drew applause seemingly every time she paused for breath.

However, industry bodies also cautioned that the Labour Government must be careful not to ‘chill’ small business investments, as it continues its first Conference in Government for fifteen years.

Business group leaders have said Chancellor Rachel Reeves “hit the right notes” as she sought to lay out a more optimistic vision in her first Labour conference speech in the role, although changes to business rules and the rising influence exerted by Trade unions are a concern to the business community.

Time is running out for Cabinet Members to continue to blame the outgoing Conservative Government for all that ails the country, and especially the economy.

With her first budget fast approaching, Reeves will need to strike a fine balance between now and October 30th between dire warnings and optimism if she is not to lose the benefits to her Party of its massive Parliamentary Majority.

Bank of England Governor, Andrew Bailey, has reiterated that the cycle of rate cuts the Bank has embarked upon recently will be both gradual and proportionate. Although the economy is likely to have flatlined this month, as it has in the previous two, inflation concerns remain, and it was these concerns that drove the MPC to leave rates unchanged last week.

Traders paused for breath yesterday after the monetary policy decisions that G7 Central Banks has taken over the past ten days.

The pound is still attracting buying interest since there is a perception that while the ECB may be forced to cut rates significantly given the state of its economy, and the Fed is protecting job creation by cutting rates further, the Bank of England is still hawkish over inflation.

Sterling rallied to a high of 1.3359 against the dollar yesterday, and closed at 1.3347, while versus the single currency, it broke the 1.20 level for the first time since April 2022, making a high of 1.2015 and closing at 1.2012.

There is a view being considered by market commentators in the U.S. that the Federal Reserve is avoiding facing up to the state of the economy, which is being masked by consumer activity that is still playing catch up after the Pandemic.

Voters may still be uneasy about the economy, but Federal Reserve Bank of Chicago President and CEO Austan Goolsbee said the U.S. is currently on what he calls a “golden path.” Inflation has cooled from historic highs without the country going into a recession, and the unemployment rate is at what economists generally consider a sweet spot.

The task will be keeping it at that level until at least the end of the year. Goolsbee said that’s why the Fed’s half percentage point interest rate reduction last week “made sense.” He predicts more rate cuts are coming.

Donald Trump attended an event in Pennsylvania, a state which is crucial to the winning of the upcoming election but took on a far greater listening brief than is usual for the normally outspoken Candidate.

It may be that the subject of the event, “Protecting our food from China” and sponsor, The Protect America Initiative, was referring to Trump’s “Playbook”.

The event, in Smithton, gave Trump a chance to drive his economic message against Vice-President Kamala Harris, arguing that imposing tariffs and boosting energy production will lower costs. He highlighted Harris’ reversal of an earlier vow to ban fracking, a method of producing natural gas key to Pennsylvania’s economy.

He noted the tractors behind him were manufactured by John Deere, which announced in June it was moving some manufacturing to Mexico and working to acquire land there for a new factory.

Trump threatened the firm with a 200 percent tariff should he win back the presidency, and it opted to export manufacturing to Mexico.

“If they want to build in the United States, there’s no tariff,” he added.

Neel Kashkari, the well-respected President of the Minneapolis Federal Reserve, is not a voting member of the FOMC this year.

Nonetheless, his views on last week’s fifty basis point rate cut is considered to be relevant. Yesterday he commented that he felt the cut was justified, but even after the cut, the “policy stance” is still tight. He does not see a need for a further “jumbo” cut this year unless the economy deteriorates, or job creation falls close to negative.

The dollar is still taking in the implications of last week’s rate cut. The index rallied to a high of 101.23 yesterday and closed at 100.94.

ECB President, Christine Lagarde, has been speaking in terms of the global economy being in danger of falling into a 1930s-style great depression and calling for trade barriers and tariffs to be removed. It seems that Lagarde may need to be looking closer to home, as the structural defects she is concerned about are almost entirely limited to the Eurozone.

While there is no public antipathy between Lagarde and her predecessor as ECB President, Mario Draghi, it is obvious that they have different modus operandi and agendas for the Central Bank.

Draghi is hailed as the man “who saved the euro”, and is considered a pragmatist and a bureaucrat, while Lagarde is undoubtedly a Diplomat. She was roundly criticized earlier this year for being more interested in relationship-building than the fate of the Eurozone economy. Her colleagues on the Bank’s Executive Committee Isabel Schnabel and Philip Lane appear to have been offering day-to-day guidance to the markets about the Bank’s actions.

Lagarde gave a less than warm welcome to the eight-hundred-page report written by Draghi at the behest of EU Commission President Ursula von der Leyen, which was published last week.

While not openly critical of the ECB, Draghi made several proposals which ECB staffers had been suggesting for a considerable time.

Lagarde’s warning of a great depression may be a smokescreen which masks her less than perfect record as ECB president.

German manufacturing output fell again this month. Preliminary data showed that output was 40.3 versus a market expectation of 42.2. Services output, which has been supporting the economy recently also fell, to 50.6 from 51.2.

After years of ignoring what the rest of the world could plainly see, Germans are slowly coming to terms with the reality that they are in deep trouble.

Migration and the war in Ukraine have masked the systemic issues which the German economy faces. The reliance on energy-hungry heavy machinery manufacture has been overtaken by China which can make it cheaper and, now, of similar quality.

Mario Draghi’s report could well apply to Germany rather than the entire region, and it would be as well for Olaf Scholz to adopt its proposals irrespective of its take up elsewhere in the Union.

The euro fell to a low of 1.1083 yesterday and closed at 1.1113 as the market began to consider that, even against its wishes, the ECB may be left with no choice but to accelerate its rate cuts.

Have a great day!