economic decision makers

Markets Driven: Politics & Economic Decision Makers

The first week of June brought us the elections results from South Africa, Mexico and India, and the first G7 interest rate cuts since before the Covid-19 pandemic in Canada and the European Union.

This week brings the results of the EU Parliamentary elections, the latest Federal Reserve (FOMC) rate decision in the USA and we are now in the last month of campaigning for the UK General election being held on 4 July.

These events collectively highlight a period of significant political activity and economic decision-making that will have lasting effects on global and regional dynamics.

Currency Exchange Rates Update: Highs

Last week, the Pound hit a: –

21-month high against the Euro.

11-week high against the US Dollar before falling back Friday afternoon.

7-week high against the Australian Dollar; and

33-month high against the Canadian Dollar.

What’s in the news? UK , USA & EU

UK: Labour & Conservative

The UK General Election is now less than a month away.

Last week saw the Conservative and Labour party leaders engaged in an hour-long debate broadcast live on ITV.

The debate came shortly after an MRP poll for Survation suggested Labour could be set for a record majority of 487 seats, leaving the Tories on just 71.

Here are five takeaways form the debate: –

  1. Continued absence of clarity on tax policy

    Sunak tried to draw a dividing line between Labour and the Conservatives on tax, repeatedly saying Labour would raise taxes by £2,000 per household while he would cut them.

    Starmer described the £2,000 claim as “absolute garbage”, saying the Conservatives only reached the figure after putting in “pretend Labour policies to the Treasury”.

    Both Starmer and Sunak pledged, again, not to raise income tax, National Insurance and VAT.

    Starmer said “we will raise specific taxes and we’re really clear where they are”.

    The debate on taxes will do little to ease concern amongst economists that neither of the main parties are being honest about the difficult choices facing the next government.
  2. Starmer says he wouldn’t use private healthcare

    Sunak said he would use private health care if he had a loved-one on a long waiting list for surgery, while Starmer said he would not.

    It came as the leaders clashed over the NHS and healthcare workers’ strikes despite both men saying, they would not give junior doctors a 35% pay rise.
  3. Labour would consider offshoring asylum seekers

    The Labour leader appears to have slightly strengthened his position on asylum seekers arriving in Britain.

    Asked whether he would consider processing asylum applications in a third country, or offshore, Starmer said: “Yes, if that was possible to do it in compliance with international law, of course.”

    The shift in the debate emerged as Sunak and Starmer argued over migration and were asked if they would leave the European Convention on Human Rights (ECHR) over the Rwanda plan.

    Sunak said if “forced to choose between securing our borders and our country’s security, or a foreign court, I’m going to choose our country’s security every single time”.

    While Starmer warned the UK risked becoming a “pariah” state if it left international conventions and said, “we will not pull out of international agreements and international law”.
  4. Personal attacks remained a theme

    Both men took the opportunity to use attack lines against one another.

    Starmer criticised Sunak for what he called “betting against the country”, during his time working at a hedge fund amid the financial crisis, in a departure from Labour’s usual warmth towards the Square Mile.

    Meanwhile, the Prime Minister accused the Labour leader of representing extremists when he worked as a human rights lawyer.

    “I don’t think the Labour Party can be trusted to keep this country as safe as the Conservatives,” he said.
  5. Both said the UK-US relationship would endure

    The UK’s special relationship with the US would continue if Donald Trump were re-elected president, Sunak and Starmer both confirmed.

    Since the ITV debate, Reform has surged to within just two points of the Conservatives in the latest YouGov poll following the return of Nigel Farage as leader.

    Mr Farage’s party is up by 2% to 17%, with the Conservatives down 2% to 19%. Labour is down 6% to 40%.

    Sunak’s UK election stirs political and financial circles.

    We then had the live BBC debate. Mr Farage hit out at the Conservatives’ record on immigration during the fiery seven-way TV debate last Friday night. Penny Mordaunt defended her party but criticised Rishi Sunak for leaving Thursday’s D-Day commemorations early. Angela Rayner, Labour’s deputy leader, appeared to flop and was mocked for calling the Tories’ record in power an “abstract failure”.

Good news: GDP & Business Services

The Lloyds’ Business Barometer showed that business confidence in the UK increased by 8% to hit 50% in May, the highest level since November 2015 reflecting both increasing optimism in firms’ own trading prospects, which rose 9% to 54%, as well as a more hopeful assessment of the wider economy.

Confidence in the economy as a whole rose 7% to 46%, its highest level since before the Russian invasion of Ukraine.

The survey was conducted during the first two weeks of May which coincided with the surprisingly strong first quarter GDP figures.

The GDP figures showed that the UK economy grew by 0.6% in the first quarter, comfortably outperforming expectations.

Inflation has also fallen much faster than anticipated to just 2.3%, its lowest level in nearly three years.

Wage growth continues to remain strong.

Employment expectations were also the most positive since 2017, while price expectations rose for a second successive month to a six-month high.

According to a new report from ‘UK in a Changing Europe’ (UKICE), UK services trade has been more resilient than almost all other advanced economies since Brexit.

The boom in services trade has been driven by ‘other business services’, which includes accountancy, management consultancy and legal services.

Unlike finance, these services are less reliant on EU membership and so Brexit has imposed fewer costs.

Business services are generally less heavily regulated than financial services and so the barriers to exchange are often lower.

‘Other business services’ has now overtaken machinery and transport to be the UK’s largest export sector.

The S&P’s purchasing managers’ index (PMI) for the construction sector rose to 54.7 in May, up from 53.0 in April. Anything above 50 indicates growth.

An upturn in commercial property helped push construction activity to its highest level in two years.

The BoE (Bank of England’s) own decision maker panel, which surveys business leaders around the country, showed that firms expect price rises to slow and wages pressures to ease.

Most economists think the BoE will be in a position to cut interest rates by September.

The S&P’s purchasing managers’ index (PMI) for the manufacturing sector rose to 51.2 in May, up from 49.1 in April, its highest level in over two years.

Not so good news: Standard Chartered

The ONS (Office for National Statistics) reported that the number of households in the UK that have never worked has hit a 12-year high.

In the first three months of this year there were 269,000 non-student households where no adult had ever been employed, the highest since spring 2012 in the aftermath of the global financial crisis.

It represents a 12% increase compared with the same period a year earlier.

Between January and March, there were 4.3 million 16 to 64-year-olds living in households where no adult was employed. This is almost 300,000 higher than the end of last year and the highest total in seven years.

Standard Chartered, one of the UK’s largest banks has been accused of carrying out billions of dollars of transactions for funders of terrorist groups such as Hamas and al-Qaeda.

Standard Chartered are alleged to have carried out the deals worth more than $100bn from 2008 to 2013 in breach of sanctions against Iran, according to newly filed US court documents.

The lender had avoided prosecution for money laundering by the US Department of Justice in 2012 when Lord Cameron’s government intervened on its behalf.

An independent expert has identified $9.6bn of foreign exchange transactions with individuals and companies designated by the US government as funding “terror groups”, including Hezbollah, Hamas, al-Qaeda and the Taliban.

The bank disputed the claims put forward by whistleblowers, saying their previous allegations had been “thoroughly discredited” in the US.

USA: Employment Data

The US NFP (Nonfarm payroll) employment data for May showed the US economy create 272,000 in May, up from 165,000 in April and well ahead of the consensus estimate for 190,000 put forward by analysts.

But the unemployment rate rose to 4%, the first time it has breached that level since January 2022.

The red-hot NFP data release raises serious questions of whether an interest rate cut in 2024 is at all tenable.

The Institute for Supply Management reported that the US services sector expanded by the most in nine months.

The EU: ECB & German Bundesbank

The ECB (European Central Bank) cut interest rates by 0.25% taking the deposit facility rate down to 3.75% whilst the ECB’s main refinancing rate and marginal lending rate was also reduced by 0.25% to 4.25% and 4.50%, respectively.

The ECB decision follows nine months when rates were held steady and is the first interest rate reduction since 2019.

There were no firm signals about future policy changes from the ECB, with it continuing to state that it remained data-dependent, explicitly noting that “the Governing Council is not pre-committing to a particular rate path”.

The German Bundesbank has lowered its growth forecast for the German economy as its manufacturing sector battles against a slump in orders and production. The Bundesbank is now predicting that gross domestic product will increase by 0.3% this year, down from its December forecast of 0.4%. It also revised down its growth forecast for 2025 from 1.2% to 1.1%, although it raised its 2026 forecast from 1.3% to 1.4%.

The Federal Statistics Office official figures this week showed German manufacturers unexpectedly produced less goods for a second consecutive month as the sector grapples with high borrowing costs with industrial production in the most dominant sector of the German economy decreasing by 0.1% in April after a drop of 0.4% in March.

German unemployment claims rose unexpectedly by 25,000 compared to the 10,000 expected. The unemployment rate remained unchanged at 5.9%.

Others: Canada, China , India , Mexico & South Africa

The BoC (Bank of Canada) became the first G7 (Group of Seven) central bank to cut interest rates, delivering a 0.25% reduction last week to 4.75% with the promise of more to come.

It was the first policy easing since 2020 and it took policy makers less than a year to go from raising to cutting rates. The move came after the core inflation rate fell below the institution’s 2% target in April for the first time since inflation began moving upwards in 2021.

Meanwhile, Jefferies Financial Group analysts warned fines against Toronto-Dominion Bank tied to US money-laundering probes may total $4 billion following fresh allegations involving the lender, double previous estimates of the potential impact on the Canadian bank. TD is under investigation by the US Department of Justice, bank regulators and the Treasury Department over allegations of financial crimes at several of the bank’s US branches.

Trade data from China showed a larger-than-expected trade surplus in May, primarily due to a stronger-than-expected rise in exports, alongside a softening in the rate of growth in imports.

Exports rose by 7.6% in May from a year ago, beating expectations for 6% growth. Imports, however, rose by 1.8% during that time, missing the 4.2% growth forecast.

China’s imports and exports to the US and the EU fell during that time.

China’s Caixin services PMI rose sharply in May, hitting 54.0, well above market expectations for an unchanged 52.5 reading from April.

The election outcome in India has turned out to be a huge political blow for Prime Minister Narendra Modi and his ruling BJP party, raising questions over his economic and political agenda.

India’s stock markets fell by $371 billion after the ruling BJP fell short of election expectations, the largest one-day loss in four years before rebounding after an alliance partner of Modi’s party affirmed support to form a coalition government, recouping some of last Tuesday’s losses.

Modi has vowed to continue as India’s prime minister even after his party unexpectedly lost its majority in parliament.

Claudia Sheinbaum has become the first female president of Mexico after a landslide victory. She capitalized on the popularity of outgoing president Andres Manuel Lopez Obrador, but inherits a country dealing with rampant criminal violence and a large fiscal deficit.

In South Africa, the ANC (African National Congress), in power since the end of apartheid in 1994 lost its parliamentary majority winning just 159 seats in the 400-member assembly firing the starting gun on complicated coalition talks.

2024, An Election Year

Quote

Miles Davis, jazz trumpeter, bandleader, and composer “Time isn’t the main thing. It’s the only thing.”

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