27 August 2024: Reeves is accused of vindictiveness

Rumours are circulating about the Labour Party’s continued affiliation with the Trade Union Movement.

Following close on the heels of the Chancellor’s decision not to reverse the two-child benefit cap and the removal of the winter fuel allowance for pensioners came the above-inflation pay awards to teachers, train drivers, junior doctors and other NHS staff.

According to one commentator, Prime Minister Sir Keir Starmer is making policy decisions based on who will vote for them at the next election.

Labour believes that its way is the only acceptable direction for the country and that all alternatives are either unfair or wrong.

Although there are always unforeseen events that will cause the Government to make “here and now” decisions, the budget, which is now less than two months away, is likely to be the new Government’s biggest test to date.

It is not clear how much effect the vehemence of the right-wing riots which happened recently has had on Starmer’s thinking, even though he has tried to show a hard line on dealing with rioters.

With the end of Summer now less than a week away, the markets will be keen to see exactly what changes to monetary policy are going to happen after months of speculation.

It is still unclear if the Bank of England will follow up the rate cut that took place on August 1st, with another cut since inflation has picked up very slightly according to the latest data.

With the Fed now fairly certain to cut rates and the ECB under pressure to follow, given the poor state of the Eurozone economy, next month is expected to see volatility increase significantly.

The UK continued to be a “bright spot” among Europe’s major economies, with surveys suggesting that the UK’s strong first half of the year will continue.

The latest ‘flash’ purchasing managers’ index, released on Thursday by S&P, showed that the UK maintained its advantage over rivals on the continent in August.

The pound has reacted to the speech made by Jerome Powell at the Fed’s Jackson Hole Symposium, in which he all but confirmed rates would be cut next month.

It rallied to a high of 1.3230 on Friday but lost ground yesterday in thin holiday-affected trading to close at 1.3187.

It is unfair to label Jerome Powell’s speech on Friday at the Fed’s annual symposium at Jackson Hole, Wyoming as dovish. It is far better described as either pragmatic or realistic.

Although, indeed, Powell has constantly been on the side of caution in counselling for caution about whether inflation has been defeated, he chose what seems to be an appropriate moment to comment that the time has come for the US Central Bank to cut rates.

The Fed chief said that the pace of rate cuts will depend on incoming data. Further, Powell said he was confident that inflation is on a sustainable path to reaching the Fed’s target of 2 per cent.

The most interesting part of his speech was when he said that the FOMC would protect job growth while trying to support price stability.

In the recent past, he has said that inflation must be the Central Bank’s focus. This was a clear reaction to the fall in job creation that was seen in the July employment report.

With almost two weeks to go until the August jobs report is published, it seems that Powell has seen enough.

The minutes of the latest FOMC meeting, which were published last week, showed a clear shift towards a rate cut, with “several” members of the Committee voting for an immediate cut in rates.

The Fed funds rate is at its highest level for twenty years and although a cut will happen on September 18th, it is still unclear what will happen after that.

It is obvious that the effect of the pandemic on the global economy is past and the inflationary effect of the measures that were taken by G7 Central Banks to support their economies have been fully absorbed. Therefore, the focus needs to change to growth.

The market has again proved the adage that it will “sell the rumour and buy the fact, as the dollar lost ground consistently over the days before Powell’s speech, but once he had spoken. The dollar began to recover, albeit tenuously.

On Friday, the dollar index fell to a low of 100.60, but yesterday it recovered to close at 100.88.

The next few weeks will determine the path for both interest rates and currencies for the fourth quarter of the year, with Powell, Lagarde and Bailey all expected to be extremely cautious about their comments.

Olli Rehn, the Governor of the Finnish Central Bank, has become the “poster boy” for the Doves on the ECB’s Governing Council, making two speeches in which he has shown concern for the level of growth within the Eurozone and calling for rates to be cut.

In his second speech last week, he said that the medium-term growth prospects for the region were significantly below those of the U.S.

He went on to say, “In my eyes, this enforces the case for a rate cut in September. We already have plenty of data to make our decision in September. Disinflation and a weak economy support a September cut, even though we are still seeing strong services inflation”.

The disinflationary process has been ongoing since autumn 2022, and it’s still going on.

Given the lack of comment from ECB Hawks over the past few weeks, it is difficult to gauge the possibility of a follow-up rate cut at the ECB’s September meeting. The picture will likely become clearer over the next ten days.

However, arch-hawk Martin Holzmann said last week that a rate cut is not a foregone conclusion next month.

ECB Chief Economist Philip Lane, a candidate for the Bank’s vice presidency, spoke at Jackson Hole and hinted at the ECB’s future monetary policy direction.

He emphasised that while the monetary stance must remain restrictive to ensure a sustainable disinflation process, there are significant risks associated with keeping rates too high for too long.

Lane has been labelled a fence sitter in recent months, but it is poignant that they are the go-to ECB officials for pertinent sound bites along with Isabel Schnabel.

The market believes that the ECB is slipping further behind the curve, much the same as it did before it began to raise rates early last year. This could lead to a severe winter “chill” hitting the Eurozone.

The relative strength of the Euro over the past few weeks has been overdone and will likely now recede as the market prepares for the upcoming monetary policy meetings from G7 Central Banks.

On Friday, it rallied to a high of 1.1201 but lost ground yesterday to close at 1.1161.

Have a great day!