5 June 2024: Sunak puts the pressure back on Starmer

The first in a series of live debates between Political Party Leaders occurred last evening. Rishi Sunak and Sir Keir Starmer came face-to-face to answer several questions about the economy, national security, the NHS, immigration, and education.

The evening began with both Leaders asked to make an opening statement outlining their flagship policies for the election.

Sunak was immediately on the attack, saying that the election was a clear opportunity for the electorate to vote for a Party with a well-defined plan for the nation, as opposed to his opponent’s lack of clear policies and vision.

This morning’s press overwhelmingly believed Sunak had won the debate, showing a degree of clarity and determination that had barely been seen during his premiership, let alone over the first days of the campaign.

Starmer was accused of planning to increase the taxation of every family in the country by two thousand pounds, an accusation that Starmer vehemently denied.

On education and NHS lists, Starmer accused the Conservative Party of fourteen years of mismanagement and missed opportunities. Yet, he was unable to put forward any coherent policies to improve the situation, instead relying on criticism of the Tories’ record in Government.

There is a long way to go before the Conservatives can even make a dent in Labour’s lead in the polls, but Sunak’s performance will have lifted the spirits of their supporters and provided a glimmer of hope for the battle ahead.

Nigel Farage has promised to be a “nuisance” to the main Parties during the election. Fresh from announcing his intention to stand for the Reform Party in the Clacton-on-Sea constituency, he was busy yesterday hogging the limelight in a manner not seen since the 2016 Brexit Referendum.

His words were a direct throwback to that time, criticizing the Government’s handling of immigration policy and offering headline-grabbing policies which appear as more wishful thinking than practical plans for the future.

His belief that the economy can achieve net-zero migration is as impractical as it is economically impossible.

Members of the Monetary Policy Committee appear to have decided not to comment further about the timing of interest rate cuts for fear of being accused of political bias.

The first cut in interest rates is now believed to be being considered for September, although several economists believe that as summer turns to Autumn, the twin threats of higher energy bills and a rise in core inflation will grow.

Sterling gave up the bulk of its gains from the previous day as the dollar bounced off its short-term level of support.

It fell to a low of 1.2743 and closed at 1.2770.

There has been a general hawkishness about comments from Fed Chairman Jerome Powell and his colleagues who make up the FOMC, both voting and non-voting members, which lead the market to believe that the first rate cut will be delayed and the overall number of cuts this year will be reduced from four to two.

Yesterday, Powell spoke of his doubt that a rate cut will be agreed upon at the meeting of the FOMC that is scheduled for next week. Inflation has become stuck at its current level of 3.6% and although there are “hopes” that job growth may be slowing, until there is solid evidence that this is a trend, the FOMC will remain “on the fence.”

Yesterday’s publication of data for job openings surprised the market by falling to their lowest level for three years.

Job openings, a measure of labour demand, were down 296,000 to 8.059 million, the lowest level since February 2021, the Labor Department’s Bureau of Labor Statistics said on Tuesday in its Job Openings and Labor Turnover Survey, or JOLTS report.

By that measure, there are 1.24 job openings for every unemployed person in the country, down from 1.3 in April. While this is a useful statistic for comparative purposes, it is misleading given the geographical difference between where the highest number of unemployed people live, compared to where the vacancies are located.

An economist at the Bureau of Labour commented that this is a continued normalization of the between labour supply and demand, it presents a challenge to the Federal Reserve to maintain the ratio of job openings to job-seekers while still bringing inflation close to its 2% target.

Five sectors of the economy; professional services, private education, retail, finance and insurance, and transportation saw a rise in vacancies as the market moved away from manufacturing and industry.

A further issue that is of concern to the Fed is the challenge to its independence that is sure to come with the nomination and possible election of Donald Trump in November.

Politics will have an even greater influence on the economy in the second half of the year as Trump and Biden outline their policies for the next Presidency.

The dollar index clawed back some of its losses yesterday as it moved away from its short-term level of support.

With the ECB meeting, at which interest rates are expected to be cut taking place tomorrow, most traders will want to hold neutral positions that allow them to be reactive to the decision and comments that follow.

The index rallied to a high of 104.33 and closed at 104.16.

Having all but announced in advance that a rate cut will be delivered at tomorrow’s meeting of its Governing Council, the ECB is frantically trying to ensure that a single cut does not provoke a “stampede of dovishness.”

Former ECB president Jean-Claude Trichet spoke yesterday of the need for prudence when changing the direction of monetary policy.

Speaking on TV, he said that a rate cut is warranted, but any further changes to monetary policy should be prudently considered and only when data confirms the need for such a move.

When questioned about what difference a single cut would make, Trichet responded that it would send a signal to the market that the overall path for interest rates is lower and introduce a change in the bias between inflation and growth.

Trichet believes that the ECB and Federal Reserve should not be dependent upon each other, since both have different influences and priorities.

There is no surprise to the improvement in the level of service output and their contribution to the overall level of activity.

Without making it a separate change to policy, there has been a natural progression away from heavy industry towards services in the wake of the pandemic, which accelerated a long overdue change.

Deutsche Bank, which itself has undergone a radical overhaul in recent times, raised its estimate for overall growth and activity in the Eurozone yesterday.

It believes that the economy will grow at a rate of 0.9% this year, up from 0.4%, based primarily on an improvement in the German economy.

However, the report suggests, this is likely to be due more to cyclical than structural reasons, with the bank’s 2025 forecasts for the Eurozone remaining the same at 1.5%.

Until the region can fully embrace wide-ranging structural changes, its economy will remain “disappointing.”

With the market primed to react to both the likely rate cut tomorrow and the comments that follow the decision, traders were not taking on further risk yesterday.

For that reason, the Euro shed some of its recent gains, falling to 1.0859 and closing at 1.0879.

Have a great day!