Key Takeaways
- A busy fortnight with US inflation data boosting expectations of interest rate cuts but UK inflation data casts doubt on whether the Bank of England will cut rates next month
- Politics in the US, UK and France have dominated the headlines, with the French elections ending in gridlock and the new UK government setting out their legislative plans
- In the US, former President Trump’s advantage in the polls continues to widen as the pressure builds on Joe Biden to quit
It has been a busy couple of weeks of news, with the focus moving swiftly on from the UK and French elections to the US presidential election, as President Biden tries to reinvigorate his campaign, while Donald Trump survived, almost unscathed, an assassination attempt at a Pennsylvania campaign rally and went on to nominate his running mate at the Republican National Convention. We have also seen plenty of economic data, with the inflation data in the US leading to a significant rotation in market leadership amid increasing expectations of a Federal Reserve rate cut in September. US mega cap tech stocks have struggled relatively while smaller companies have seen a very strong rally on hopes that the Fed will cut rates in September.
Let’s start with politics and after the events of the past couple of weeks (I am not mentioning football tournaments) the French legislative elections feel like a long time ago. The outcome was a surprise but highlighted the success of the centre and left-wing parties at co-operating to ensure the far-right National Rally party failed to win a majority. In the final count, the outcome was gridlock with no political bloc anywhere near a parliamentary majority of 289 seats. The left wing New Popular front ended with 178 seats, President Macron’s centrist alliance took 156 seats and the far-right National Rally 143 seats. French Prime Minister Gabriel Attal offered his resignation, but President Macron asked him to stay on “for the time being to ensure the country’s stability.” Coalition negotiations have been slow moving with parties a long way from finding common ground and no-one willing to work with the far-right. The fallback option is for a technocratic government led by a non-partisan Prime Minister followed by fresh elections next year but policymaking in the interim looks near impossible.
Moving across to the US and the failed assassination attempt on former President Donald Trump on Saturday, in which he received only very minor injuries, appears to have galvanised his support, with the photo of a bloodied Trump raising his fist in defiance while being taken to safety by the Secret Service likely to be one of, if not the, defining image of this election. The probability of a Trump win is now 66% from 55% previously per RealClearPolitics. Before the weekend, Trump was already 3.5% ahead in the national poll of polls and ahead in the key swing states. President Biden implored candidates to cool their rhetoric, warning the nation was heading down a dangerous path, saying the country must resolve its differences through democracy.
The violence in Butler, Pennsylvania and Trump’s response has set the tone for the Republican convention in Milwaukee this week and has been a strong motivator for Republican voters. In his speech to the convention last night, Trump said he had been “saved by the grace of almighty God” and vowed to crack down on immigration, slash taxes and renew trade wars if he wins the election. Trump called for national healing and an end to “discord and division” but warned US trading partners that he would revive the trade fights that were a theme of his first term in office – “We have long been taken advantage of by other countries, often being considered our allies. We lose jobs and revenue, they gain everything, and wipe out our businesses. I stopped it four years ago, and I will stop it again.” The convention saw Trump choose Ohio Senator J.D. Vance as his running mate. Vance is very much in the Trump mould in terms of his isolationist world views, having previously criticised NATO and the ongoing funding for Ukraine, arguing that Ukraine should cede territory to end the war. In his speech to the convention, Vance said there will be “no more free rides for nations that betray the generosity of the American taxpayer… together we will make sure our allies share in the burden of securing world peace”. It looks like many nations are likely to need to ramp up their defence spending in the event of a Trump/Vance victory.
Meanwhile, the lack of enthusiasm in the Democratic camp for Joe Biden continues to manifest itself publicly, with various senators and senior party officials either publicly or privately calling on the President to make way for another candidate. Since Biden’s disappointing performance during the 27 June TV debate, in front of fifty-one million viewers, his every word and deed has been under intense scrutiny to justify why he should, or should not, continue in the campaign. The decision remains in the hands of Joe Biden, who has previously stated he has no intention of stepping aside but the pressure is clearly building. Biden said he is best qualified to defeat Trump and “still has time” to recover from a “stupid mistake” of his debate performance. For now, everything is going the wrong way for the Democrats, and it not obvious that a new ‘unknown’ candidate would shift polling against Trump. If (and it’s a big ‘if’) the Democrats reluctantly stick with Biden, it will be hard to motivate their voters to turn out – and there is no such problem for the Republicans and Trump.
Onto the economic data, and the inflation data in the US was very positively received in markets, with CPI for June at 3.0% year on year, below expectations. The recent core CPI data for the past three months is now running at an annualised rate of just 2.1%, the lowest pace since March 2021. The Chicago Federal Reserve’s Austan Goolsbee described the data as “excellent” and his view “is this is what the path to 2% looks like.” The CPI data fuelled expectations that the Federal Reserve is moving closer to cutting rates, with a 25-basis point cut in September now fully priced in futures markets. Fed Chair Jay Powell told a Senate hearing that “more good data” would strengthen confidence that inflation is moving down towards their 2% target and recent readings point to “modest further progress” on prices. Powell warned lowering rates too early or too late could put the economy and the labour market at risk. He said, “elevated inflation is not the only risk we face… reducing policy restraint too little or too late could unduly weaken economic activity and employment.”
The US employment data was strong at the headline level, with 206,000 jobs created in June, but the revisions of -111,000 to previous data took the edge off the news. Closer to home, UK inflation data held steady in June, with CPI unchanged at 2% versus 1.9% expected. Services CPI remained unchanged at 5.7% which calls into question if the Bank of England, who predicted a level of 5.1%, will feel comfortable cutting rates while inflationary pressures remain. Prior to the CPI release, an August rate chance was seen as a 50% probability, but this fell to 35% on the news. The UK employment data showed continued wage growth at a level outside of the Bank of England’s comfort zone at 5.7% year on year. The unemployment rate was unchanged at 4.4%. China released second quarter GDP data, with year-on-year growth of 4.7%, the weakest pace in five quarters and below the 5.1% expected. Growth was hampered by weak consumer spending and demand, with retail sales up just 2% year on year, well below expectations and highlighting how the post-Covid consumer rebound appears to be losing momentum.
The European Central Bank meeting yesterday saw interest rates kept at 3.75%, as expected. ECB President Christine Lagarde said the decision on a rate cut in September was “wide open” but dismissed worries over sticky inflation. Lagarde said the governing council had agreed not to provide forward guidance and said “what we do in September is wider open and will be determined on the basis of all of the data that we will be receiving”. Eurozone inflation was 2.5% in June, having peaked at 10.6% in 2022. Lagarde said while inflation was on a “disinflationary track”, rates needed to be kept high, saying “we will stay in restrictive territory for as long as it takes to get to target and we are not at target”.
In the King’s speech, the new Labour government in the UK set out their policy priorities with 40 bills including areas such as planning reform, workers rights and pension changes. Prime Minister Starmer said “now is the time to take the brakes off Britain” as King Charles III opened Parliament, which Starmer said he hopes marks the start of a “decade of renewal”. It is clear the government is indeed thinking of 10 years at least in office given their landslide election win and working majority of 180 seats. Chancellor Rachel Reeves said the new government has inherited “the worst set of circumstances since the second world war.” The Chancellor is preparing the ground for tough decisions on the public finances while promising to prioritise growth such as unblocking housing development and onshore wind farms. A review of public finances will be published before the summer recess and will “pave the way for difficult choices in the autumn Budget.”
I will be taking a break from these updates for a few weeks – enjoy your summer holidays if you are heading away (hopefully to some better weather) and the updates will return later in August.
A reminder that Adam and I recorded a webinar earlier this week covering macro views, performance, positioning and a look how the 24 predictions we made for the year are faring. You can listen to the replay here.
Kind regards,
Anthony.
Source: Bloomberg as at 19 July 2024
