31 July 2024: Labour is in rebellion already

Deputy Prime Minister Angela Rayner announced yesterday that she plans to reintroduce mandatory targets for house building, with a target of 370k new homes to be built a year.

It is difficult to understand what sanction councils will face should they not meet the target since they already need cash. In the worst circumstances, councils will have to either cut services or raise council tax to pay fines from the central government.

Therefore, the Government is planning to provide funding to local councils to build new homes but take it away if their targets are not met.

Dianne Abbot and her old boss, Jeremy Corbyn, have both spoken of their disappointment at the means-testing of the pensioner’s winter fuel payment which, only six weeks ago, the Prime Minister described as essential to the welfare of the elderly.

The cap on social care costs was a cornerstone of Health Secretary Wes Streeting’s’ election campaign. That has now also been removed.

It is time for some “grown-up” politics now. The previous Government likely left the country’s finances in a mess, but it was their mess to deal with as they saw fit.

It looks like the added tax revenue generated by an economy that is growing at a faster rate than any country in Europe was going to “bail out” Hunt and Sunak since they left the Government with their “plan” unfinished.

In a report published this week, it was shown that the private rental sector in London alone is worth close to fifteen billion to the economy, and forty-five billion nationally.

This underscores the value of property rental as a pivotal part of the housing market, but the authors, PwC, acknowledge that the sector needs to work on its image given the history of no-fault evictions and poor maintenance of privately rented properties is often making headlines.

As the market prepares for tomorrow’s Monetary Policy Committee meeting, the Sterling saw further selling pressure as traders were reminded of the possibility that the Committee may vote in favour of a loosening of monetary policy.

It fell to a low of 1.2820, and its closing level of 1.2835 was its lowest in three weeks.

The FOMC is inching closer to a loosening of monetary policy. At its two-day meeting which concludes today, its Chairman, Jerome Powell is expected to acknowledge that inflation is now controlled despite the employment market, one of the key contributors to price increases, is still a concern.

Data for job openings, which is the “traditional curtain raiser” to the publication of comprehensive numbers for employment, culminating with the non-farm payrolls data which is due for release on Friday saw openings fall marginally, but that may be sufficient to deter the FOMC from agreeing to a rate cut this month.

Powell is expected to confirm that the FOMC is in a position to begin to cut rates “soon”. It is doubtful that he will be any more certain than that.

Over the past few months, FOMC members have flip-flopped from expecting to see three or even four rate cuts this year, to saying that only a single cut may be possible, predicting no cut at all and even a single rate increase.

The fact that members of the committee will have had access to more data over the six weeks since the last meeting, but perhaps crucially, not the July employment report may have convinced them that it is now time for a cycle of rate cuts.

Powell will be wary of falling into the same trap as the ECB, where it backed itself into a corner by confirming market expectations ahead of the meeting at which it announced a rate cut.

Powell will likely hint at a cut in September, with the caveat that the Fed is still data-driven.

The number of job openings on the last business day of June stood at 8.184 million, the US Bureau of Labor Statistics reported in the Job Openings and Labor Turnover Survey (JOLTS). This followed the 8.23 million openings (revised from 8.14 million) reported in May, which was above the market expectation of 8.03 million.

The dollar index rallied to a high of 104.80- following the release of the data, which all but confirmed there won’t be a rate cut this month, but it was unable to cling onto its gains and settled back to close at 104.47.

Germany is used to supporting the Eurozone economy but now finds itself in the possibly invidious position of propping it up instead.

Updated data for Q2 GDP which was released yesterday showed that the German economy contracted by 0.1% between April and June, following a 0.2% expansion in the first quarter.

By contrast, Spain grew by 0.8% and Italy by 0.2%.

Overall, the Eurozone grew by 0.3% which was unchanged from the first quarter.

The eurozone entered a technical recession in the second half of 2023, and while analysts said that the latest figures suggest it is healing, it’s still unclear how long the recovery will last. The economy is “crying out” for a series of rate cuts, but so far, the ECB is still reticent to loosen monetary policy while inflation is still above its 2% target.

Economic growth in Europe has lagged far behind the US and even some developing economies, one economist told the press, “Leave out Spain and you just have an economy that moves along at a lacklustre growth pace.”

Germany has become weaker, and it could turn out to be a more significant drag for other countries, too. It has hardly grown at all since the start of the pandemic, prices are still almost 20% higher than pre-pandemic levels, and industrial orders are slowing down.

That is a reason why Isabel Schnabel and her hawkish colleagues on the ECB’s Governing Council have consistently voted for rates to remain unchanged even after it became clear that the single cut that was agreed in June even though its effect on inflation was negligible.

It is hard to understand why the region’s uneven growth deters the ECB from cutting rates. The ECB is likely to “move cautiously,” one economist said as it worries about strong services inflation, although lower borrowing costs are very much needed for consumers to start buying goods again.

This is not a new issue, the U.S. has outpaced the Eurozone in GDP terms since the end of the 2008 financial crisis, yet the ECB is still what the market considered to be overly concerned by inflation, to the detriment of growth.

The Euro saw increased volatility as it traded between 1.0835 and 1.0798, although it closed only marginally weaker at 1.0815 which was close to its lowest closing rate this month.

Have a great day!