3 December 2024: Starmer seeks a “reset”

The Prime Minister believes the UK does not need to choose between America and Europe as a “prime trading partner.” Speaking at the Guildhall last evening, Sir Keir Starmer told the Lord Mayor’s Banquet that his government is committed to creating strong trading partnerships with Brussels and Washington. He added that he also wants to strengthen relations with Beijing.

Business confidence remains fragile in the UK as the Budget continues to cause issues for businesses considering expansion but will now see costs for employing new staff increase.

During the prime ministership of Rishi Sunak, he was always on the brink of a reset as he tried to find a formula that would lead to prosperity, particularly concerning Brexit.

Government Ministers were sent out to appear on TV this weekend’s political magazine shows to hint at a major policy event that the Prime Minister will host this week but were clearly told to avoid the word “reset.”

An event is planned for this Thursday at which Starmer will signal a new phase for the government, as part of his ‘plan for change’. He and his team are trying to turn the page on a torrid start to his premiership.

Cabinet Ministers are expected to set a series of new ambitious targets in a bid to show they are listening to the concerns of ordinary voters. These include cutting NHS waiting lists, reducing crime, improving living standards and boosting early-year education.

While they are talked up as a development of the five missions Starmer announced in opposition, they are intended to be more precise and relevant to people’s everyday lives.

Since it is now agreed that the Budget was a “one-off” fund-raising exercise which will not be repeated during the term of this Parliament, the funding is now in place to move forward to achieve the targets that were set out in the Labour Party Manifesto.

Starmer is said to be concerned that the Cabinet has constantly “harped on” about the mess it inherited from the previous Government, and now after 150 days in power, he wants to look forward, not back.

The first survey on the health of the economy after the Budget makes for a gloomy reading. Businesses have reported falling output for the first time in just over a year, while employment has now been cut for two consecutive months.

Although only marginal, the downturns in output and hiring represent marked contrasts to the robust growth rates seen back in the summer and are accompanied by deepening concern about prospects for the year ahead.

Business optimism has slumped sharply since the General Election, dropping further in November to hit the lowest since late 2022. Companies are giving a clear ‘thumbs down’ to the policies announced in the Budget, especially the planned increase in employers’ National Insurance contributions.

The pound began the week under pressure as the market returned from the Thanksgiving holiday. It fell to a low of 1.2617 but recovered to close at 1.2654.

Three members of the FOMC spoke yesterday, and they each told a tale about the prospects for looser monetary policy.

Federal Reserve Bank of New York President John Williams said officials will likely need to lower rates further to move policy to a neutral stance now that risks to inflation and employment have become more balanced, while Atlanta Fed President Raphael Bostic said on Monday that he’s undecided on whether an interest-rate cut is needed in the December meeting, but still believes Fed officials should continue lowering rates over the coming months.

Meanwhile, Federal Reserve Governor Christopher Waller said he is anticipating an interest rate cut in December, but is concerned about recent trends in inflation that could change his mind.

Based on the economic data in hand today and forecasts that show that inflation will continue its downward path to 2% over the medium term, at present I lean toward supporting a cut to the policy rate at our December meeting,” Waller said

None of the Fed officials felt confident enough to mention the November employment report, which is due for release this Friday, possibly because they did not want to be put on the spot by being asked for an estimate of how certain levels of job creation may affect their rate decision.

The ISM Manufacturing PMI (Nov) data which was released yesterday surprised me with the upside. Although the market was expecting a marginal increase, the data showed that output rose to 48.4. Although still in contraction, the data showed a significant improvement over October.

Chicago Fed President Austan Goolsbee and Governing Board member Adriana Kugler are scheduled to make speeches later today, and the market will consider what they say carefully as the chances of a rate cut at the December Fed meeting still appear to be unclear.

Asset markets like the S&P 500, the Dow Jones Index and the Nasdaq are all close to their yearly highs and may be due for some correction before year-end. However, unless the data that is due over the next two weeks points towards a downturn or President-Elect Trump adds more “meat” to his plans for tariffs which could lead to a trade war, market participants are confident that any correction will be of the “healthy variety.

The dollar index recovered from last week’s mild correction, during which it closed lower in four of the five sessions. It may still attract some selling interest above 106.80, but for now remains well-supported.

Yesterday it climbed to a high of 106.73 and closed at 106.40.

The first of the employment reports will be published today. JOLTS Job Openings is a survey done by the US Bureau of Labor Statistics to help measure job vacancies. It collects data from employers including retailers, manufacturers, and different offices each month. Vacancies are predicted to have risen marginally from 7.44 million to 7.48 million in November.

The French Government is facing a vote of confidence as Prime Minister, Michel Barnier, forced through the 2025 Budget without the approval of Parliament.

Barnier faced an abrupt end to his premiership Monday after key opposition parties said they would back a no-confidence motion against his government after only three months in power.

Certain that the National Assembly would deny him a majority backing the government’s social security financing plan for next year, Barnier forced through the bill without a vote, using executive powers granted to him as Prime Minister.

No party has a majority, and parliamentary elections cannot be called until July next year.

A stalemate would torpedo France’s effort to wind back a budget deficit now heading beyond 6% of GDP, a danger zone that has sent French sovereign bonds spiralling towards Greek levels and raised fears of a 2009-style eurozone crisis.

The no-confidence vote is likely to take place later this week or early next, assuming that the right-wing populist National Rally party, led by Marine Le Pen and her protégé Jordan Bardella, makes good on its threat.

National Rally has been pushing for changes to Mr Barnier’s swingeing €60 billion ($97 billion) program of tax increases and spending cuts, which he and Macron hope will start to staunch France’s haemorrhaging public finances.

The Left is determined not to approve Barnier’s Budget plans, which has handed Le Pen a level of power over him that she has craved since she failed to come out on top in the summer elections.

The European Central Bank should make future monetary policy decisions based on upcoming risk rather than the latest economic data, ECB chief economist Philip Lane told the Financial Times. Once the disinflation process is completed, then I think monetary policy needs to be essentially forward-looking and to be scanning the horizon for what are the new shocks that might lead to less or more inflation pressure,” Lane said.

The fight against inflation still blinkers Lane and his colleague Isabel Schnabel and do not see that the economy needs the stimulation that lower interest rates would provide.

Schnabel said recently that the European Central Bank should ease policy only gradually, and cutting rates to a level that starts to stimulate growth may not be appropriate, adding that her base case is that the Eurozone will avoid a recession in 2025.

The euro is being driven by the possibility of a fifty-point cut at the ECB’s December meeting.

The output data which was published yesterday points to a more significant loosening of monetary policy. Manufacturing PMI remained at 45.2, although it fell in each of the major Eurozone members.

The Euro began the week on the back foot, falling to a low of 1.0460, although it recovered to close at 1.0500.

Have a great day!