Markets Weekly podcast – 11 July 2022

Julien Lafargue (JL): Thank you for joining a new edition of Barclays Private Bank’s Market Weekly podcast. My name is Julien Lafargue, Chief Market Strategist, here at Barclays Private Bank, and I will be your host today.

As usual, we will start this podcast by taking a look at the recent events that impacted the markets before moving on to our guest segment. And this week, following the resignation of Boris Johnson as UK prime minister, we will get a very timely update from our government relations expert, Olivia Gleeson.

But let’s first cover last week’s main events. Front and centre was the US job report for the month of June. The market was prepared for a relatively weak print as several surveys suggested, the ISM, as well as anecdotal evidence have pointed to a deceleration in the pace of job growth in the US. Well, that didn’t happen last month as the US economy added 372,000 jobs, significantly above the 250,000 the consensus was pencilling in.

People will be quick to point to this as a clear indication that a recession in the US is highly unlikely. However, I think it’s important to keep in mind that the labour market is a lagging indicator and that it may take months for a slowdown to materialise in the employment figures. That being said, when putting together the still solid wage growth, the record number of job openings, and the stagnant supply of labour, in the form of the participation rate, mean that the Fed can’t yet claim victory over the boiling hot US job market.

As such, investors have increased their bets that the US central bank will hike by 75 basis points later this month. We believe it’s possible, but a lot will depend on this week’s inflation reading, which we’ll get on Wednesday. This is what’s going to decide whether the Fed goes 50 or 75 basis points.

Now, the other key news of the week was the rumour that Chinese authorities are considering issuing some 220 billion dollars’ worth of debt in order to stimulate their economy. This would be a front-loading of next year’s spending and would be directed primarily towards infrastructure. With the country’s economy having suffered from a severe lockdown earlier this year, a large stimulus had become increasingly likely if China is to meet its 5.5% GDP growth target. And, while sizeable, this stimulus would still sit with local governments, meaning that Beijing has yet to step up.

We believe this is what will come next and, as we’ve mentioned multiple times before, Chinese assets and stocks, in particular, appear well positioned to recover some of last year’s underperformance in the second half of 2022. 

Of course, we couldn’t record this week’s podcast without spending some time on what’s been happening here in the UK and the resignation of Prime Minister Boris Johnson.

To cover this topic, I’m very pleased to be joined by Olivia Gleeson, our government relations expert here at Barclays. Olivia, thanks for joining us. And to set the theme, could you recap for listeners the dramatic events that unfolded last week in Westminster and where we stand today?

Olivia Gleeson (OG): Of course, and thank you for having me today. I think, you know, as we all know the government has had a pretty bumpy ride of late. They’ve been rocked by a litany of scandals coupled with very turbulent economic conditions, but last week it really did implode and was pretty dramatic, even by Westminster’s standards.

It started with several high-profile resignations. First from Sajid Javid, the health secretary, and then Rishi Sunak, the chancellor, within minutes of each other on Tuesday evening. And then quite quickly that trickle of resignations turned into a pour, with countless senior and junior ministers resigning their posts.

Now, Boris Johnson desperately tried to cling on throughout, pointing out that he had a mandate from the British public and wanted to get the job done. He even attempted to try to appoint new ministers to post, including our new chancellor, Nadhim Zahawi, but by Friday, it did appear that the game was up, and even his remaining loyalists, you know, including that new chancellor he only appointed a day or so before, told him his position was untenable and he simply couldn’t go on.

So, on Friday you saw the prime minster step out of Number 10 and deliver a sort of, you know, less than magnanimous resignation speech making it clear that he was going to step down, but in his mind, it was the Tory party and not the public that had led to his departure.

So, Boris Johnson remains in Number 10 but only as a caretaker leader presiding over a caretaker government until the next Conservative party leader and, ultimately, prime minister can be elected.

JL: So, when I think about this new leader, this new prime minister, I understand that the process to get him or her elected is quite complex. So, can you explain to us what happens next in terms of steps to get there?

OG: Absolutely. Now, we love complex and convoluted rules in the UK, so I’ll try and keep it as simple as possible. So, essentially, the 1922 Committee, that’s the backbench Conservative MPs who sort of preside over the governance of the party, they will set the timetable and, indeed, the rules of the contest.

Now, if we look back to 2019, that leadership contest took around six weeks, so we can probably expect a new leader in post by early autumn, so mid-September, in time for those crucial party conferences.

Now, the first stage, as set by the 1922 Committee, will be that every sort of Conservative MP who puts their name forward and, you know, as I woke up this morning, there’s 11 and counting, will need the support of several other Tory MPs.

Now, previously the rules have been that they need eight nominations or supporting nominations from other MPs, but the understanding is the 1922 Committee, they’re meeting today to discuss the rules, I think they want to speed this process up, and it’s pretty likely they might raise the bar for the number of supporting MPs each candidate might need, so more than eight.

Now, with more than two candidates standing, which we expect given there already are 11, there will then be a series of ballots to reduce to a final two candidates, with candidates getting knocked out each round that have the least amount of MP support. And then finally, Conservative party members, of which we think there are about 200,000 or so, will then vote on the final two candidates, presuming there are still two in the race.

Now, all of those rules could be subject to change and, as we record, there is likely to be an announcement this evening from the 1922 Committee on the exact next steps. So, that’s roughly the process to be aware of.

JL: It does sound complicated indeed, but as you mentioned, it looks like there are a number of people going for the role, 11 as of this morning. Do you have any insight into the runners and riders for this new prime minister role?

OG: Absolutely. And I think with 11 candidates it’s already set to be a pretty fascinating race. Now, I won’t sort of bore you with a full run-through of every candidate, on the podcast, but we have some potential frontrunners I think I can touch on, you know, starting with Rishi Sunak, the former chancellor. Now, he’s consistently topped the polls as the public’s favourite to be the next prime minister, although, you know, his role in ‘Partygate’ and scandals over his wife’s taxes have slashed his popularity somewhat recently.

Now, he’s come out over the weekend with a pretty slick promotional video positioning himself as, you know, a competent hand and best placed to tackle the cost-of-living crisis and turn the economy around, and he already has quite a few prominent backers from within the Conservative party.

We’ve also got Sajid Javid, the former health secretary. He’s pledged to cut corporation tax if he makes it into Number 10. And we’ve just seen a leadership bid, I think yesterday, from Liz Truss MP. That was widely anticipated. She’s our foreign secretary and she’s again promised to cut taxes, even committing to reverse April’s national insurance rises.

Now, there’s, you know, a handful of other candidates. There’s some more junior ministers, there’s some chairs of select committees, and I think, you know, the thing to notice, there is wide spread of MP support for each of these different candidates, and each of these different candidates will present, you know, a slightly different vision for the Conservative party, going forward.

We’re seeing signals of that now, but it’s only in the coming weeks they will begin to flesh out those visions in more detail. So, I definitely wouldn’t place a bet yet that the frontrunners now will ultimately be successful. There’s always plenty of room for surprises. And if we think back to the last leadership race in 2019, you know, Rory Stewart MP made it pretty far and he was an unknown, well, a relative unknown, until that race. So, lots to look out for in the coming weeks, for sure.

JL: Thank you very much, Olivia. Clearly, there is a lot more coming up on that story and is probably a saga that will keep us busy for most of the summer, so we’ll probably have you back at some point. Thanks again.

To finish off, let’s take a look at the main catalysts for this week. Number one will be in the US, on Wednesday the CPI print, and the Street is modelling +8.8% year-over-year on the headline, with some whispers up to 9% and even more. As mentioned previously, this will be the key factor in deciding whether the Fed goes 50 basis points or 75 basis points next. Anything about 8% and a 75-basis point hike will become the base case.

Now, this week will also see the beginning of the US earnings season with banks leading the way on Thursday and Friday. We will recap these in next week’s podcast, but they are likely to set the tone for the rest of the earnings season. We expect good earnings but rather cautious guidance, mostly on weaker financial markets activity.

Anyway, still plenty to cover for next week. Until then, though, let me wish you the very best for the trading week ahead.