26 July 2024: Mortgage rates are beginning to fall

The mainstream press in the UK appears to have got wind of Rachel Reeves’ intention to raise twenty billion pounds to fill a “black hole” in the country’s finances.

It will be done by lowering the threshold for people to top up their pension. This is currently 100%, but the Treasury wants to reduce it to 30%.

As reported yesterday, the blame for the Government going back on its promise not to raise income tax will be laid firmly at the door of the previous Chancellor, who she will claim left the country’s finances in the worst state since the Second World War.

A lack of investment in the NHS, Prisons, and Education has left the new Government with little alternative.

This is being seen as hardly surprising since there have been some doubts raised by think tanks like, the Office for Budget Responsibility, of Labour’s ability to fulfil manifesto promises without raising taxes or cutting public services. Reeves has opted for the former.

The Government is in the fortunate position of the Conservative Party being in complete disarray since the election with its leader, Rishi Sunak, becoming a “lame duck” with no replacement leader expected to be announced until October.

Candidates for the position have begun to “throw their hats into the ring,” but so far Tom Tugendhat, Robert Jenrick, and James Cleverly are unlikely to excite the Party membership.

With a majority allowing it virtually free rein to do as it wishes, it is hoped that Labour makes a better fist of things than the fiasco that followed Boris Johnson’s 2019 election victory.

The “Big Five” UK banks have predicted a significant fall in the level of bankruptcies and loan defaults this year as the economy continues to gather strength.

Lloyds Bank has set aside just forty-four million pounds for bad loans in the current quarter, as it expects the economy to grow at 0.8% this year. This is less than other financial institutions have predicted but is better than the 0.4% Lloyds had predicted earlier in the year.

The pall of pessimism that enveloped the country earlier in the year appears to have been lifted by Labour’s election victory, but it still has not completely evaporated, given the level of mistrust of Keir Starmer’s less-than-socialist agenda, which has been highlighted by his refusals to remove the two child cap on welfare benefits.

The financial markets have reached the point where liquidity and volatility have fallen significantly due to the summer lull.

Next week will see the Monetary Policy Committee meet and the idea of a cut in interest rates is gaining momentum. Most commentators still believe that Andrew Bailey will wait until September, but a cut next week would now be less of a surprise.

Sterling lost ground as the idea of a rate cut next week took root. It fell to a low of a.1850 and closed just one pip higher, at 1.2851.

The U.S. economy grew by 2.8% in the second quarter, doubling Q1’s growth of 1.4%, but storm clouds may be gathering as the tech giants that now virtually control the Dow and Nasdaq have been reporting lower second-half profits.

Investors are looking to “get into” smaller AI startups, which they see as having greater potential for exponential growth.

The FOMC which is due to meet next Tuesday and Wednesday faces a difficult choice over its next two or three meetings.

While it is doubtful that Jerome Powell has seen enough of a fall in the current rate of inflation to cause him to drip his hawkish attitude, there remains the possibility that it may be a case of now or never, certainly at this meeting or the next.

It is considered as Autumn begins inflation will begin to tick up, and despite his comments to the contrary, Powell will have to consider the election as the country may be still facing a core inflation rate above 3% by then.

It would be “flying in the face of tradition” if a rate cut were announced at either of the next two meetings since to cut rates when the economy, given that in the past fifty years, no FOMC has voted for a rate cut during a time of expansion.

There have indeed been naysayers who say the rate of growth is simply an illusion. Elon Musk spoke earlier in the week of his concerns that the country is essentially bankrupt given the level of government borrowing. It is believed that twenty-five per cent of GDP is being used just to service the interest payments on Government borrowings.

There is no expectation that the level of the National debt can continue to rise. Donald Trump has promised to cut borrowing if he is elected, but in typical Trump style, he says a lot of things that are popular with voters which are soon forgotten.

The FOMC won’t have access to the July employment report when it meets next week, The latest data is not due until Friday. Even Federal Reserve economists who are considered to be “Top Gun” by the market often see their prediction for the headline number of jobs created to be “way off.”

The dollar continues to drift, driven only by the market’s expectation for next week’s rate decision.

The index lost ground initially yesterday, then rallied as the GDP data was published. It reached a high of 104.45 and closed at 104.41.

Christine Lagarde, as has been said before, is not having the best of years. She has faced criticism from within the ECB for her approach to the role of President, considering it to be more of a figurehead than her predecessors, particularly Mario Draghi, while leaving the “nut and bolts of the role” to members of the Executive Committee like Isabel Schnabel and Philip Lane.

It is understood that Emmanuel Macron is considering offering her the role of Prime Minister, which would “kill two birds with one stone.”

She would be in a role that suits her diplomatic skills since she would have to deal with both Jean Luc Melenchon’s left-wing New Popular Front and Marine Le Pen’s right-wing National Rally, at a time when the French economy is on the verge of a recession.

Leaving the ECB before her term is over may “sting” a little with Lagarde, but she could console herself with taking over the second most important job in France.

For the ECB, it would allow it to “go back to basics” and recruit a banker with a skill set more suited to the role.

Lagarde’s Vice President Luis de Guindos hinted at an interest rate cut in September, singling out the ECB’s new projections as the “most important” factor in determining whether inflation is falling back to target.

He said the ECB paused last week after cutting rates in June because it would have more data in September, including fresh internal forecasts for inflation through 2026.

It is expected that those forecasts will be more positive for an environment in which monetary policy can be loosened.

Globally, there is a view that the three major G7 Central Banks may have been too cautious by waiting for the entire second quarter to pass by without cutting rates, even though the ECB “dipped its toe in the water” last month.

De Guindos is looking at long-term inflation projections, with a goal of core inflation being at 2% by the end of next year. It seems that although having a long-term goal is admirable, the ECB needs to look closely at the prospects for growth this year, which would certainly benefit from a series of rate cuts.

The Euro initially lost ground following De Guindos’ remarks, but it rallied strongly later in the day, reaching a high of 1.0870 before settling back to close at 1.0845.

Have a great day!