3 July 2024: Economic growth is the very definition of irony

The more positive economic data is released, Rishi Sunak’s decision to call a General Election is deemed premature and ill-advised.

With campaigning all but done, former Prime Minister Boris Johnson, who has been conspicuous by his absence from the limelight as the Conservatives have attempted to play catch-up, appeared at a Conservative rally yesterday and galvanised supporters with a rousing speech in which he labelled a Labour “supermajority” as “pregnant with horrors”.

It was clear that Johnson still retains the charisma that drove the Conservatives to victory in 2019 and his presence has been sorely missed this time.

Accountancy firm KPMG’s latest Global Economic Outlook believes that the economy is beginning to show signs of momentum. The report finds several reasons for optimism, with consumption being supported by the cuts to National Insurance contributions, which are expected to boost real household disposable income by 1%.

Consumer confidence is gradually improving as the employment market is still buoyant as inflation has fallen to reach the Bank of England’s target, even if this is temporary.

The reality of the UK fiscal situation will be unchanged whichever Party wins tomorrow since both the Tories and Labour have put forward spending plans which will be tough to deliver without either raining taxes or cutting services.

The Conservative Party has a “tradition” of being more “trusted” to manage the economy than Labour, and Labour Leader Kier Starmer has been strident in his efforts to remove that conception.

His nominee to be Chancellor of the Exchequer, Rachel Reeves, has the credentials to succeed as the first female to hold the position, having been endorsed by former Bank of England Governor Mark Carney for whom she worked during his term in office.

Labour has driven home the message that this election is about change but change for change’s sake is no reason to change direction entirely.

After tomorrow, Labour will need to deliver on some tough promises since it will not get a smooth ride from Opposition Parties who after licking their wounds will be keen to hold them to account.

The Pound has ended higher in each of the past four sessions, reflecting the overwhelming hopes that things are about to change. Yesterday it rallied to a high of 1.2688 and closed at 1.2685.

Data published yesterday showing the number of job openings showed that the employment market is still resilient nearly a year after the Fed paused its cycle of interest rate hikes, leaving the Fed funds rate at a fifteen-year-high.

The JOLTS Job openings data showed that 8.14 million vacancies remained open, following a downwardly revised number of 7.9 million in April.

The air of positivity that this creates bodes well for the remaining data due for release this week, although the headline number of new jobs created is still notoriously difficult to predict.

Fed Chairman Jerome Powell, speaking at the ECB’s retreat in Portugal, noted progress in bringing inflation into line with the Central Bank’s target of 2% but also confirmed his view that there is “still more work to be done”.

After a bumpy first quarter, Mr Powell said recent data suggests that the economy is getting back on a disinflationary path.

U.S. equity markets rose on the back of Powell’s comments, with the S&P 500 and Nasdaq making record highs.

With the spectre of a rate hike no longer hovering over the markets, traders and investors are confident that the Fed will be able to begin to cut rates “sooner rather than later”.

This note of optimism may be tested by the publication of the minutes of the latest FOMC meeting, which is due later today. FOMC members have provided mixed messages in their most recent pronouncements with Regional Presidents seemingly keener to commit to one or two rate cuts this year, while Board Members appear more reticent, as inflation remains above target.

Powell himself has gradually “adjusted the dial” towards a marginally more dovish outlook but is still “driven by the data”.

With a holiday tomorrow to celebrate Independence Day, the market will have several data releases to chew over including Jobless claims, Challenger Job Cuts, and Manufacturing and Services output for June to accompany the FOMC minutes.

For what it’s worth, the latest prediction for the non-farm payrolls data is for 190k new jobs to have been created, but the number that will interest Jerome Powell and his colleagues the most will be the average hourly earnings, which are expected to have fallen to 3.% from 4.1% in May.

The dollar index retreated to the middle of its recent range yesterday. It fell to a low of 105.68 and closed at 105.70.

The Eurozone has become a lot “scarier” economically than the sum of its parts.

The ECB has faced several challenges over the past ten or so years that have threatened the Union’s very existence. Contagion has been a watchword for the Central Bank, but experience has shown that individual fires can be extinguished without going to extremes.

While that is a positive, the fact that the two largest economies in the Eurozone are struggling either politically or economically is likely causing a few sleepless nights in Sintra, Portugal where the Central Bank is holding its annual retreat.

Germany is finding growth hard to come by even as energy costs begin to fall. Its economy is lacking confidence with no end to the war in Ukraine in sight, while in France, the Centre and Left-Wing Parties are attempting to unite to fight off the threat of a Hard Right Prime Minister being elected which could throw its entire economy into turmoil.

There is a plan for both Renaissance and New Popular Front are planning to only run a single Candidate in Sunday’s second vote to try to disrupt the apparent “march to victory” of Marine Le Pen and Jordan Bardella.

The more moderate French electorate which appears to be centred in and around Paris has a “heroic complacency” according to the media, in which they believe that their compatriots will draw back from the brink, despite President Emmanuel Macron having lost all credibility.

Outside of Paris in the South of the Country, where there is a great deal more militance, there is a strong feeling of “cleansing” the country of its domination by Brussels.

Le Pen has spoken of her admiration for the British, who were brave enough to leave the European Union.

There has been a chorus of anti-establishment anger, which was easily seen from last Sunday’s election result. When added together, the hard left and hard right won more than two-thirds of the vote. It is hard to imagine that against that backdrop, Macron will be able to remain in power irrespective of the outcome on July 7th.

The ECB will have been relieved that the first sign of the path for inflation following the rate cut was positive. Headline inflation fell to 2.5% from 2.6% in May.

While this is unlikely to galvanize the Governing Council to sanction a further rate cut in the near term, it shows that they were right to cut rates when they did.

The euro rallied to a high of 1.0747 yesterday and closed at 1.0745. It remains hemmed in by sell orders placed at or around 1.0780, but there is still strong support at 1.0680.

Have a great day!