9 September 2024: GDP is set to be flat in July

Time is running out for the Prime Minister to be able to blame the previous government for all that constantly ails the country since the Labour Party won the July 4th Election.

Keir Starmer has had a “political get out of jail free card” since entering Ten Downing Street due, in the main, to the Conservative Party being in total disarray.

The final growth data related to Rishi Sunak’s time as Prime Minister will be published this week. It will show that the GDP was flat in July, although in the three months before July, the economy grew by 0.8%.

Starmer appeared on television yesterday and was forced to defend himself against a charge that he put public sector workers ahead of pensioners when deciding where the meagre pot of available funding should be spent.

The latest unemployment data is due for publication tomorrow. It is expected to show that the unemployment rate is still around 4.1% and average earnings continued to fall over the past three months.

It is questionable if the fall in earnings will be sufficient to persuade the five members of the Monetary Policy Committee who voted for a rate cut at the previous meeting to continue to vote for rates to be cut.

Andrew Bailey has been conspicuous by his absence over the past two weeks. At that time, he spoke of his optimism that the Bank of England would be able to reduce interest rates more quickly.

He may well be concerned that growth is beginning to tail off after two positive quarters, as the economy has recovered from the mild recession that it experienced at the end of last year.

Last week, the pound was flat, gaining only marginally as the market first considered the likely outcome of the U.S. employment report for August, and then reacted to it.

It closed the week just three pips higher, at 1.3130.

The period before the next FOMC, during which committee members cannot provide guidance to their voting intentions, began yesterday.

This means that for the next ten days, market participants will be “in the dark” about whether the more hawkish Regional Fed Presidents and Fed Governors have been mollified by the data that has been released over the past six weeks.

Friday saw the monthly “jamboree” that surrounds the publication of the employment report.

142k new jobs were created last month, which was more than in July but was below market expectations. July’s disappointing figure of 114k was revised down to 89k.

The revision carried more significance than the headline number, although it wasn’t considered sufficiently poor to encourage a fifty-point cut when the FOMC meets, on September 18th.

Speculation over a fifty-point rate cut continues, with J.P. Morgan’s Chief Economist commenting that it may be the “right thing to do,” no doubt encouraged by his boss’s recent comments.

However, investment and financial services giant BlackRock sent a note to investors in which it commented that a fifty-point cut may signal concern rather than confidence in the economy.

Raphael Bostic, the President of the Atlanta Fed, took a final opportunity to comment on the options that face the FOMC next week.

Despite being one of the more hawkish members of the Committee, Bostic is “coming around” to the idea that a loosening of monetary policy may be both possible and needed.

He is keeping an eye on both parts of the Fed’s mandate, by noting that job creation is slowing while inflation is approaching its 2% target.

Austen Goolsbee, the President of the Chicago Fed, commented immediately following the release of the jobs report that the FOMC will be looking at its next three meetings to decide a medium-term strategy for loosening policy.

Fed Governor Christopher Waller, normally one of the more hawkish members, commented in the wake of the report’s release that he is open-minded about the size of this month’s cut.

The market was a little nonplussed by Friday’s employment report. Poor enough to encourage the Fed to act, but not sufficiently so to lead to a fifty-point cut, particularly since average earnings rose from 3.6% to 3.8%.

Jerome Powell has not shown any particular concern recently about the “secondary effect,” where wage levels promote rising inflation down the road.

The dollar lost a little ground following the report’s publication but failed to pierce the support that it has built up at 100.60. It fell to a low of 100.69 but rallied to close at 101.19.

“Monetary Policy Month” will kick off on Thursday as the ECB’s Governing Council holds its scheduled meeting to decide on the level of interest rates.

A fifty-point cut is not going to happen as several members of the Council are concerned that inflation is still an issue, with Chief Economist Philip Lane saying on Friday that it remains unclear whether inflation will reach its 2% target over the next eighteen months.

Lane repeated the comments that he first made at Jackson Hole two weeks ago, in which he said that the monetary stance will have to remain in restrictive territory for as long as needed to shepherd the disinflation process towards a timely return to the target.

Cryptically, Lane also expressed the view that inflation may slip “chronically” below the 2% target if rates are not cut as soon as it is possible to do so.

Since returning from her holiday, Christine Lagarde has remained tight-lipped about the meeting, which takes place this Thursday. This may well be a deliberate ploy since her recent comments have either confused the market or “given the game away.

It has become clear recently that investors prefer to judge the ECB’s actions based on the comments from either Lane or his fellow Executive Board Member, Isabel Schnabel.

She commented in an interview on Friday that “The closer policy rates get to the upper band of estimates of the neutral rate of interest – that is, the less certain we are how restrictive our policy is – the more cautious we should be to avoid that policy itself becomes a factor slowing down disinflation”.

The ECB will be forced to “play the cards it has been dealt,” since there is no Tier One data due for publication before Thursday’s meeting.

Despite inflation having fallen considerably over the past six months, the hawks on the Council may still want the safety net provided by a further delay, although the market consensus is for a twenty-five-point cut to be agreed this week.

The Euro is finding the rarefied air at its current level a little tough to break through. Last week it rallied to a high of 1.1155 but was unable to break above significant resistance and fell back to close at 1.1084.

Have a great day!