Markets Weekly podcast – 18 November 2024
18 Nov 2024
Election special and US inflation
01 July 2024
With voters in France and the UK heading to the polls, Sonia Fernandes, from the UK Government Relations and Policy team at Barclays, considers what we might expect in the coming days. Topics include the last week of campaigning in the UK and the next round of voting in France.
Meanwhile, host Henk Potts gives us the lowdown on US interest rates, eurozone inflation and the US employment market.
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Henk Potts (HP): Hello, it’s Monday, 1st July, and welcome to the Barclays Private Bank Markets Weekly podcast, the recording that will guide you through the turmoil of the global economy and financial markets. My name is Henk Potts, Market Strategist with Barclays Private Bank. Each week, I’ll be joined by guests to discuss both risks and opportunities for investors.
Firstly, I’ll analyse the events that moved the markets and grabbed the headlines over the course of the past week. We’ll then consider the implications of the French legislative election, and preview the UK’s General Election. And finally, I’ll conclude by previewing the major events and data releases that are likely to shape the week ahead.
A bit like the England football team, it was somewhat of a lacklustre performance for equity markets last week. Political uncertainty on both sides of the pond, soft consumer corporate results and rumblings that the AI boom has gone too far, too fast led to equity market gyration. That said, sentiment was helped at a macro level as activity remains resilient, inflation expectations continue to suffer.
In terms of the performance, the S&P 500 was actually flat over the course of the trading week, although the benchmark index did trade above the 5,500-mark on Friday, before tailing off.
In Europe, the STOXX 600 fell on four out of the five trading sessions. The index was down seven-tenths of 1% over the course of the week but was basically flat over the course of the month. In fact, the STOXX 600 did register its fourth consecutive half-yearly gain. It was up 6.8% in the first six months of this year, with technology, media and banking sectors as standout performers.
However, French stocks remained under pressure ahead of yesterday’s legislative election. The CAC 40 fell to a five-month low on Friday. According to Bloomberg data, the CAC 40 quarterly showing marked the biggest underperformance against the EURO STOXX 50 since the creation of the common currency in 1999.
In bond markets, we also saw that European political uncertainty playing out. The spread between German and French bond yields remained elevated. France’s 10-year bond yield rose to its highest level since November.
Now, after a rollercoaster quarter, US Treasury yields finished close to their starting point. Now, if you remember, the 10-year yield did trade above 4.7% back in April but closed out the quarter at 4.26%.
On the macro front, as we know, the big datapoint of the week was Friday’s personal consumption expenditure’s price index. Why is that so important? Well, it’s the Fed’s preferred measure of inflation.
So, what did we learn? Well, US price pressures significantly slowed in May with the core PCE inflation measure slowing to 2.6%, which is the least we’ve seen, actually, since early 2021, driven lower by weakness across household furnishings, recreational goods and softer durable goods. Core goods slipped into deflation. There’s a notable softening in core services, particularly financial services.
Alongside the inflation report, we also got a snapshot on household spending, where consumer demand rose more than expected last month, led by a six-tenths of 1% increase in spending on goods, which helped to offset a lacklustre rise in services, which flatlined for a second consecutive month.
The spending data, I think, shows that the mixture of rising wages, healthy household balance sheets and low savings rates is helping to support demand. Personal income growth accelerated to half-of-1% month on month. The savings rate rose to 3.9% in May, but that’s still below that 6.5% to 8.5% range that we saw before the pandemic.
However, we would expect personal consumption growth to moderate over the course of the coming year, as rising unemployment plays out and consumers continue to run down their excess savings that they built up during the course of the pandemic.
So, what does that all mean for US rates, most importantly? Well, the weaker inflation print adds to the evidence that a Fed rate cut later this year is still on the cards, though the timeframe for that still remains very wide. We see September as being the earliest, but the reduction may not be realised until the December meeting, as resilient activity in labour markets may infringe upon a further rapid disinflationary progress.
So, that was the global economy and financial markets last week. In order to discuss the ramifications of the dramatic French election and look ahead to this week’s UK election, I’m pleased to be joined by Sonia Fernandes. She’s Vice President of Government Relations and Policy for Barclays.
Sonia, great to have you with us today. Yesterday was certainly a big night for French politics with the first round of the French elections. Can you talk us through the results?
Sonia Fernandes (SF): Yes, of course, and great to be back again to talk about the French elections this time. We saw 12 million voters turn out for RN, Marie Le Pen’s party, with just eight million more than two years ago, the last time the French had elections, in 2022.
We saw a huge voter turnout, a 40-year high at nearly 67% of voters turning out to vote in the first round. So, a real demonstration of public sentiment. We’re seeing about a third of the seats getting about 33% or above for RN, a swing lower than expected, about 28% to the left-wing new populist front, and Macron’s Ensemble less than 20% of the vote, coming in third.
So, in terms of results, not unexpected. So, there was a slight downswing on the right-wing front, which actually is a positive for Macron, who was taking this large gamble really to bring to a head the politics around the right-wing parties in France. So, we’re seeing a surprising volume of turnout for French voters, particularly the swing to the right, but not as far a swing as expected.
And this really does mean that going into the second round of elections, there is a curious combination of possible scenarios. We could see that in a number of constituencies, there are lots of three-way races. It does mean that, well, typically you would expect to see just two parties go into the second round, but we’re expecting in the next couple of days, they have to sort it out by Tuesday, a lot of negotiation and trading of seats, hopefully, as Macron is expecting, to counter the right-wing movement, but a lot more to play out this week.
HP: So, plenty of deals being sorted out and debates taking place behind doors over the course of the next few days. So, what can we expect out of the second round of voting, and what does this mean for the future of the French government?
SF: It’s quite difficult to predict, but, at the moment, it’s looking that the most likely scenario is a hung parliament. And, just to explain a bit about the French government and how that’s set up. So, of course, Macron retains his seat as president. It’s not an election for his presidency. He has the right to name the prime minister, which is typically the winning party, so where there’s a clear majority that’s very helpful.
Whereas a hung parliament, that leads to quite a tricky debate around who gets which coalition, so we might see a period after the voting where there is time needed for a clear majority, a coalition, to form. And that leads to quite a unique situation in French politics, of what’s called ‘cohabitation’. So, this has only happened three times since the last world war, where the party of the president is different to the majority party in parliament.
And what might that mean for governing? So, Macron’s term does not come up until 2027 and, actually, this is really the point of his snap election, by going so early, is to, in a way, if it is the right-wing RN that forms a majority or forms the coalition, that he can put some boundaries around how they make policy.
And, of course, we’ve seen, you know, certainly Marine Le Pen’s party had a slight shift away from some of their extreme views in order to gain voter appeal. But still, you know, important things like looking very insular, looking internally at issues such as, you know, welfare, you know, their role in Nato etc. So, we would expect to see, if it is a right-wing government that forms, but Macron as leader, hopefully he will intend to try to put some boundaries around what right-wing policymaking might look like.
And, of course, as president, he still retains the right over foreign policy, which will speak a lot to future potential government relations or international government relations between the UK and France, and more importantly the UK and the EU, which were maybe up for debate, with the UK elections and what happens there.
HP: Well, we also know it’s the last week of the UK election campaigning period. Can you take us through what to expect this week, and what we can anticipate will happen on polling day?
SF: Yeah, so finally made it to the last week and also it was a relatively quick election campaign. However, for those of us in it, it has felt like a long one. So, I think all parties will be holding their breath and hoping that nothing goes wrong this week, that Labour will want to maintain their sobriety through this week and not be in any headlines.
The Conservatives, very interesting in the last week of polling, are actually fighting on two fronts. So, trying to shore up the vote against Reform, who are increasingly, if the polls are correct, becoming quite strong contenders for a number of Conservative seats, and, of course, trying to shore up their vote against Labour.
And, of course, voting happens on Thursday. The polls close quite late in the UK. They close at 10pm. So, after a day of voting, the first sign of results will happen shortly after 10pm, with the first exit poll. And as we know, exit polls are not infallible, they’re purely an indication. And then it will be the race to see which is the first seat that is declared, probably between 10pm and 11pm.
But really the guts of it only really happening will be in the very early hours of Friday morning, between 3am, 4am, 5am. So, typically in the UK elections, the clear majority is, if there is a majority, but of course the polls are telling us there will be one, typically happens around sort of 5am.
Interestingly, both Keir Starmer and Rishi Sunak’s seats are expected to be called about the same time, around 3.30am, 4am. And then, of course, Friday morning wake up quite early, by 7am we should know who the new government will be.
So, really, you know, if you’re not a politics nerd, like I am, you can turn on Wimbledon in the evening and go to bed early and wake up to a new government. For the rest of us, we’ll have been watching with toothpicks in our eyes for the 3am-to-5am period.
HP: Well, Sonia, thank you for your insight today. We’ll now wait to see how that UK election plays out of course on Thursday, and the second round of voting in France, which is due on 7th July.
Moving back to this week, beyond the political machinations, markets will focus on eurozone inflation data and the US employment report. Taking into account the inflation data releases that we saw from France, Spain and Italy at the end of last week, we look for Tuesday’s data release to show that headline euro inflation in June edged down to 2.5% year on year, due to an easing of price pressures in food, alcohol and tobacco. As well as a softening in core goods, services inflation is expected to hold steady. Alongside the headline reading, core inflation should also moderate. We expect core inflation to print at 2.8%.
Now, Friday’s nonfarm payroll report is expected to show a further gradual easing in labour market conditions. We project that the US economy created 200,000 jobs in June, which would be lower than that 272,000 increase that was registered in May. We look for average hourly earnings to continue to rise, forecasting a rise of three-tenths of 1% month on month, making the annual rate 3.9%, and look for the unemployment rate in the US to hold steady at 4% and for the participation rate to slightly increase.
With that, we’d like to thank you once again for joining us. I hope you’ve found this update interesting. We will, of course, be back next week with our next instalment but, for now, may I wish you every success in the trading week ahead.
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