27 June 2024: With a week to go, how accurate are the opinion polls?

The UK has just one week to go until it goes to the polls to elect a new Government. Last evening the Prime Minister and the Leader of the Opposition took part in the final debate, and although nothing new came from the verbal jousting of Rishi Sunak and Sir Keir Starmer, their body language in many ways told the public more than the two leaders have in a month.

Starmer appeared hesitant and lacking his recent confidence in his Party’s message, while Sunak had the air of an NFL quarterback about to launch a Hail Mary pass.

Tax, immigration and the economy remain the major topics of the election. Sunak, despite being discredited several times, is still convinced that a vote for Labour is a vote for higher taxes, while Starmer points to the Conservative Party’s record in office.

On immigration, Sunak was again rumourmongering, stating that Labour has not announced a policy in which there will be an amnesty declared for all illegal immigrants which will encourage more to attempt to cross the English Channel in small boats.

It is on the economy where Sunak has a chink of light to rely upon. As Labour has tried to convince voters that the “bad old days” of Conservative rule will be swept away next Thursday, it has been a little more vague about what will replace it.

With S&P having upgraded its forecast for the economy in the past few days and a think tank predicting that Labour will enjoy an extended “honeymoon period” since the economy is on the cusp of significant upward momentum provided by, among others, Taylor Swift.

The unseasonably poor weather seen in April, which led the economy to flatline, is not expected to have derailed growth in the entire second quarter.

The CBI published its latest industrial trends survey earlier this week and it was also positive for the most part. The “bosses union” expects the economy to grow “modestly” in the three months to September. Order Books saw quite an encouraging turnaround in May, which should contribute to a slow but steady improvement in GDP.

The level of nascent positivity in the economy begs the question; why did Sunak call the election so long before he had to? There has been no follow-up to the theory that the economy was going to “head south” again in the fourth quarter when he would have been forced to hold an election against a far less positive backdrop.

The pound lost ground versus the dollar yesterday, falling to a low of 1.2615 as the market began to position itself ahead of the election. It closed on its short-term support level, which, if broken, could see it fall to 1.2550, its lowest level in a month.

The picture of the next three months for U.S. monetary policy has become unnecessarily clouded over the past few days. The market had just settled into the idea that the FOMC would continue to preach patience to those expecting a rate cut to have taken place already, with a second “just around the corner.”

The slowdown in the rate of deflation has put paid to that theory, and it has been replaced by the idea that a single rate cut will be all the support the market receives this year.

That feeling of comfort, encouraged by comments by FOMC mouthpiece, Austan Goolsbee, the President of the Chicago Fed has been placed in doubt by comments from the Fed Governor, Michelle Bowman who prompted a far more hawkish view to a conference in London this week, in which she outlined several risks that may warrant a tightening of monetary policy.

She believes that overall, it would be unthinkable for the Fed to cut interest rates with inflation “nowhere near” under control, while the employment market continues to create significant numbers of new jobs.

This may lead to a wage/price spiral, which it is surprising has not manifested itself yet.

Although weekly jobless claims are rising, their level is still well below what would be expected given the apparent lightness of monetary policy.

Bowman’s comments were something of a departure for her. She has spoken recently of her view that rates may need to remain elevated for a considerable time. This view is consistent with other members of the FOMC, but to suggest that the next move for interest rates may be a hike is not something that the market has contemplated recently, other than a vague suggestion about how to bring inflation under control.

One of Bowman’s colleagues on the board of the Federal Reserve, Lisa Cook, took the polar opposite view when speaking on Tuesday. She believes that the dot plot which shows a single cut taking place this year is “about right,” with inflation expected to begin to fall more rapidly next year.

Today’s publication of Personal Consumption Expenditures is likely to reinforce the market expectations about rates remaining on hold. The latest prediction is for headline PCE to be unchanged at 3.6%.

The dollar index climbed to a high of 106.13 yesterday and is close to challenging its highest level this year. It closed at 106.06 as the market prepares for tonight’s televised debate between the Presidential Election Candidates.

Finnish Central Bank Governor Olli Rehn predicted in a speech yesterday that the ECB will deliver a further two interest rate cuts this year.

This was a significantly more dovish outlook than provided by ECB official Isabel Schnabel earlier in the week, when she doubted that there was an imminent decoupling of monetary policy about to take place between the Eurozone and the U.S.

Rehn said he was not surprised that the road to lower inflation had several bumps in it, but despite this he sees interest rates falling over the next fifteen to eighteen months to around 2.25%, which will provide significant support to the Eurozone economy as a whole and several member states which are ci=currently struggling to find any growth.

One such country is Germany.

Yesterday’s publication of the influential IFO index of business activity made disappointing reading.

In manufacturing, the business climate declined after three rises in a row. Companies were again more sceptical for the months ahead. They were particularly concerned by the declining order backlog but were more satisfied with current business levels.

Germany’s trade picture has declined noticeably in the second quarter of the year. Pressure on exports created by competition from China, particularly in the automotive sector, has been significant, especially in the field of EVs.

Germany’s continued reliance on energy-hungry heavy machinery may get some relief from the fall in energy prices that is happening currently, but that relief may be short-lived.

It is hard to imagine Chancellor Olaf Scholz being sufficiently forward-thinking to be able to commit to the level of systemic change that the German economy needs to regain its position in the global economy.

France goes to the polls this week, with National Rally well ahead in polls. The Government of Emmanuel Macron is considering a loose alliance with the far left to defeat Marine Le Pen’s far-right Party.

Far Left Leader Jean-Luc Mélenchon says that he is not interested in supporting an ailing and out-of-touch government.

The Euro is suffering from the uncertainty. It fell to a low of 1.0660 and closed at 1.0680 yesterday.

Have a great day!