8 July 2024: The UK has a minority Government!

By far, the most significant outcome of the General Election, which was won comfortably by Labour, was the fact that they managed to gain a majority of 172 seats while only increasing their share of the vote over 2019 by 2%.

Furthermore, Reform UK gained over four million votes yet only won five seats in Parliament, while the Liberal Democrats received fewer votes, but managed to win seventy-two.

There is certain to be a clamour for electoral reform from the right wing, while the Conservative Party licks its wound and tries to regroup.

It will do so under new leadership, as Rishi Sunak is expected to tender his resignation this week.

Meanwhile, Keir Starmer and his new Chancellor Rachel Reeves attempt to implement policies that will create sufficient growth to enable Labour to keep its Manifesto undertaking not to raise taxes while improving the NHS and other public services.

Reeves has already begun to say that there is “little money available”, while Starmer followed her lead by saying that progress will be “slow”.

As the dust settles on a momentous night for the Labour Party, it has become clear that the challenge that faces it will be huge, yet the electorate having accepted their claim that they desire change they needed to vote Labour, comes to terms with that the Labour Manifesto that was long on promises but short on actual policies.

Apart from calling for electoral reform, Nigel Farage’s Reform UK Party will be sure to be counting the number of small boats crossing the channel with “undocumented arrivals” and demanding when the Government plans to put in place measures to deal with them.

Reeves has already caused a stir by commenting that the State Pension is a benefit that should not be seen as a right, despite part of working people’s National Insurance contributions going towards it.

She has said that she is considering removing the right to receive a state pension from anyone earning more than £30k per annum who has paid into a private or company pension for thirty years or more.

Added to the removal of the tax break where VAT is to now be added to fees for private education, as is always the case, the devil is in the details.

Data for industrial and manufacturing production will be published this week, as well as monthly GDP data. The data will show that the economy continues to grow, albeit at a snail’s pace, while there may be some more encouraging news from the NIESR estimate for Q2 growth, which is expected to predict growth of 0.7% between April and June.

The Pound enjoyed a storing week due, in no small part, to weaker-than-expected employment data from the U.S.

It rallied to a high of 1.2817 and closed at 1.2814.

Fed Chairman, Jerome Powell, has continuously said that the FOMC needs to be both proactive and data-dependent when it is deciding on the course for monetary policy.

Last week’s publication of monthly employment data provides him with the perfect opportunity to achieve the former, while also being wary of the latter.

The headline number of jobs created was 206k which was marginally higher than market predictions, although estimates mean little in this context, while the number was down from a significantly revised lower figure of 218k for May.

Wages fell only slightly to 3.9% from 4.1% in May. This is unlikely to encourage a rate cut this month, although the path for job creation may well lead to a cut in September.

On the surface, the US employment report for June looked good. Some 206,000 jobs were added, which exceeded the 190,000 median estimate of more than five dozen economists in a recent survey.

Wage growth also continued to moderate, easing concern that fast-rising earnings would underpin inflation. But look a little deeper, and you can see why so many are worried the soft patch that the economy seems to have run into may get even softer – or worse.

The number of jobs created in April and May was 111k less than previously reported, this means that 177k new jobs were created in the second quarter, significantly less than the average of 267k in the first quarter.

This may well interest the FOMC, despite their continued concerns about wage growth and inflation.

The data also revealed that it took an unemployed worker on average 9.8 weeks to find a new job, the longest time since February. 2022.

Temporary job numbers also tumbled, falling by their most since April 2021.

Jobless claims are also on the rise. The latest figures show that 1.86 million people were claiming benefits in the week ending June 22.

The expansion in the labour force is allowing employers to be a little “pickier” when hiring, this led the unemployment rate to rise to over 4% for the first time since late 2021.

The “softness” of the data drove the dollar index to its lowest level in a month. It fell to a low of 104.84 last week and closed at 104.88.

This week, Jerome Powell will make his semi-annual testimony before the Senate. His remarks are published ahead of his appearance on Capitol Hill and will mostly confirm what is already known to the market.

In the second round of the legislative election held in France yesterday, the left sprang a major surprise.

The far-left NFP Alliance became the largest single Party in Parliament but failed to gain an overall majority.

This was a surprise that led Marine Le Pen’s far-right National Rally to fall to third place.

The ploy of the left to combine to stymie support for the right succeeded, but France, not used to coalition government, faces further uncertainty which may well lead to another election sooner rather than later.

National Rally leader Jordan Bardella called the cooperation between anti-NR forces a “disgraceful alliance” that would paralyze France.

The hard left won 182 seats in the 577-seat parliament, while Emmanuel Macron’s Centrist Alliance won 163 and National Rally 143.

Macron can choose who he wants as Prime Minister but many within his alliance have said they will not work with France Unbowed, the hard left party led by Jean-Luc Mélenchon which is the largest in the NFP alliance.

Le Pen confirmed that she would run for the Presidency in 2027 and said that the “rise of the right” would continue.

Business growth across the entire Eurozone fell significantly, driven by a sharp contrast between the robust services sector and a lacklustre and weakening manufacturing sector.

Services PMI slipped to 52.8 from 53.2 in June, while manufacturing continued to decline, slipping further into contraction.

With the continued slowdown of manufacturing output and the desperate need for a structural reorganization of some of the largest economies in the region, Germany should see the ECB considering another cut in interest rates imminently.

However, Madis Muller, the Governor of the Estonian Central Bank summed up the mood of the Governing Council by telling reporters that although borrowing costs may well fall again before year-end, the ECB is concerned that wage growth is still too high and could still lead to a wage/price spiral.

Last week, the Euro benefitted from a potential closing of the gap between U.S. and Eurozone monetary policy. The single currency rallied to a high of 1.0842 and closed at 1.0839.

This week, Germany and Spain will publish inflation data. This is expected to remain unchanged at 2.5% and 3.5%, respectively.

Have a great day!