Markets Weekly podcast – 18 November 2024
18 Nov 2024
UK General Election special and US growth
03 June 2024
Join Sonia Fernandes, Vice President of Government Relations and Policy at Barclays, as she delves into the General Election on 4 July. As well as exploring the key issues driving the main parties’ campaigns, she also considers what we can expect to see in the first 100 days of a new parliament. Meanwhile, Henk Potts also provides a rundown on the latest developments in financial markets, including crude oil prices, US growth and a key upcoming decision from the European Central Bank.
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Henk Potts (HP): Hello, it’s Monday, 3rd June, 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 for 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 possible impact of the UK General Election. And finally, I’ll conclude by previewing the major events and data releases that are likely to shape the week ahead.
It was a volatile time for financial markets last week as US first-quarter growth was revised lower, and investors had to navigate the unpredictable global political backdrop. However, the softer-than-expected US PCE print helped to refuel expectations of interest rate cuts, helping equities to recover whilst pushing treasury yields and the dollar lower.
The late rally, we saw on Wall Street on Friday, helped to limit the weekly loss. The S&P 500 was down over the course of the trading week but was only off by half of 1%. We should remember that the benchmark index was up an impressive 4.8% during the course of May.
In Europe, a similar picture. The improving economic backdrop and positive earnings helped stocks during the course of May. In fact, the STOXX 600 advanced 2.6% during the course of last month. In terms of commodities, well, over the weekend there was actually mixed messages coming through from the OPEC+ meeting as the group tries to keep oil prices elevated amid the slowing global economic backdrop and concerns over Chinese demand.
Crude prices, we should remember, have come under pressure in recent weeks. Brent crude just finished May at $81.62 a barrel. That was down 7.1% over the course of the month, so the cartel agreed to extend production cuts of roughly two million barrels per day into next year, but will maintain flexibility over the implementation of reductions, and said curbs would be phased out in the year starting from October.
If you’re looking for the winner, well, I think over the weekend, it appeared to be the UAE, which secured a 300,000 barrel per day increase for its production target starting next year.
Now, renewed hopes of Fed rate cuts, strong central bank buying and robust Chinese consumer demand continues to support gold. In fact, the precious metal hit a new record high during the course of last week, gold trending at around $2,327 an ounce this morning, was up around about 14% during the course of this year.
In terms of currencies, well, the Swiss franc appreciated. In fact, the franc registered its strongest week of the year against the euro and the dollar. It was up round about 2% during the course of May. The move follows the S&P’s threat to sell the currency in an effort to ease inflationary pressures. Remember, the Swiss franc weakened pretty dramatically in the first quarter of this year, after the Swiss central bank became the first major central bank to cut rates. The comments have increased the risk of market intervention but, as we saw from the movements in FX markets last week, it’s also encouraged traders to pare back the chance of a further rate cut during the course of this month.
Now, on the macro front, US first quarter GDP was revised down to 1.3%. That’s three-tenths of 1% lower than the advanced estimate. The downgrade reflected lower levels of consumer spending. There was also a deceleration in government spending and lower levels of trade and inventory investment.
The weaker levels of consumer spending also actually shone through in terms of the PCE data. Household spending fell one-tenth of 1% month on month. Overall, I think the data adds to the evidence of this gradual slowdown that we’re seeing in the US economy. We think that will continue to play out in the coming quarters. The positive for investors was that month-on-month easing of the Fed’s preferred measure of inflation for April, with PCE price inflation slowing to 2.7%, whilst the core reading came in at 2.8%, helped by an easing of core services.
Overall, I think the report should boost policymakers’ confidence that inflation will continue to decelerate in the coming months, paving the way for rate cuts in late summer in the United States.
So, that was the global economy and financial markets. In order to discuss the UK General Election, I’m pleased to be joined by Sonia Fernandes, Vice President of Government Relations and Policy for Barclays.
Sonia, great to have you with us today. Now, the UK prime minister seems to have taken most by surprise by calling this snap General Election. What do you think the rationale for that was, and what impact do you think the timing will have?
Sonia Fernandes (SF): Thanks, Henk, and great to be here. Yes, indeed, it did take almost all, in fact most, by surprise and what can only be sort of attributed to be some signs of positive news around inflation that may have influenced the PM’s decision to announce on that rather rainy 22 May, a somewhat ironic day one might say, not least for having spawned many a meme of him standing in the rain announcing for 4 July.
And there have been a number of factors that led to that decision, including, you know, perhaps the sign of a turning economy towards a positive news story, or perhaps quite the opposite, with quite a number of tricky policies to play out in the forthcoming weeks where the PM felt that actually it was time to call it. But it took most by surprise as you say, and the timing is quite an interesting one as we head into the summer.
So, what have we seen in the not-quite two weeks since the announcement, which is quite a long time in politics? We’ve had the legislative wash-up. So, we’ve seen the rush to include important pieces of legislation, most importantly the Leasehold and Freehold Bill was passed, along with the Digital Markets, Competition and Consumers Bill. A couple were dropped. So, the Renters Reform Bill, that has long been awaited, was abandoned. And parliament dissolved on Thursday, so last Thursday, 30 May and that means that MPs are no longer Members of Parliament and those standing for election become prospective parliamentary candidates.
That has left quite a curious element that’s happening now in terms of how do we get to 4 July, where the snap election has actually led to quite a vast volume of seats that are still vacant.
So, if I look at what’s happened on either side. So, for Labour, they’ve nearly filled all of their seats. However, as of last week, they still had, you know, quite a few where MPs are retiring and they haven’t yet found or announced the favoured candidates on these rather safe, so you’d expect to see sort-of quite the types of candidates being announced in those seats where they really want them to have the prospects of winning.
And that’s led to quite a bit of distraction over the weekend, in particular, the row over Diane Abbott and who can run. But the important date there is 7 June, this Friday, which is the final date for candidate selection. And for the Tories, the Conservative Party, they’re in a bit more of a bind because they still, again, as of last week, about 30% of seats that are yet to be selected. So, that’s quite a lot that we will have to expect them to have to race to Friday to fill.
And we’ve seen some interesting moves. So, we’ve seen that Nigel Farage has said that he’s not standing. Corbyn is running as an independent. And we’ve seen Michael Gove confirm that he is, indeed, retiring, and we may see more of those sorts of announcements during the week.
So, the rush to the polls has been perhaps a positive one in the prime minister’s mind when he first announced it but led to quite a lot of machinations that still have to happen this week.
HP: OK. Well, we’ll be watching that list of candidates being announced very carefully indeed, no doubt. But let’s turn our attention to the polls. There’s a great deal being made of course of the lead that Labour may have. So, the question is, is a Labour victory a foregone conclusion?
SF: Yeah, indeed. Well, in politics they say that the most important poll is the election, which is 4 July, so nothing is a given until it’s confirmed. But, yes, that’s right, Labour has gone into the campaign with about a 20-point lead. However, you’ll have seen already quite a lot of numbers being tossed around and over the last week suggestions that the lead is narrowing.
Now, this is quite normal as a campaign goes on and we see sort of changes in different expectations around voting populations. So, at the end of last week we saw a bit of a narrowing of the lead, Labour’s lead, largely attributed to a greater proportion of over-65s turning to the Conservatives, perhaps in reaction to the announcements such as military service, which appeals to this demographic.
We’ve also seen a fewer volume of Tory voters saying that they intend to vote Reform. And, again, perhaps the announcement that Farage is not running could have influenced that.
But if you allow me to be nerdy for a minute about polling, you know, these things are very interesting in an election cycle. A couple of important things to note when we talk about polls, so, firstly, there are many methodologies, but polls generally test voting sentiment right now. So, if you went to the poll today or in the future, so what might happen on election day itself.
Now, some commentators are clearly the what-happens-on-election-day, whereas others make a lot of noise over what are people’s sentiments now where there’s a lot of variance in what people say. But the second element and quite an interesting one in this election is how undecideds are treated. So, this election is quite a curious one in that we are seeing the largest population of undecided voters going into an election. So, a lot of ground to be gained if those undecideds make up their mind between now and 4 July.
But, overall, at this stage of the campaign, yes, Labour does have a firm lead, one that doesn’t seem to be being able to be shaken by the Conservatives, with a strong lead expecting above a 100-seat majority. And perhaps as the leaders’ debate comes up tomorrow, we might see more people changing their minds or confirming their plans.
HP: Well, there’s nothing like getting into polling methodology to get us all very excited. Sonia, what can we expect from the first 100 days of a new government?
SF: We expect the incoming PM will be asked by the King to form a government, the start of the new Parliament on 9 July. And, actually, just a very short two weeks where MPs will be around, if the timetables stay as they are. So, we’ll see the MPs sworn in on the 9th, between the 9th and the 12th, and the all-important King’s Speech on 17 July.
Now, that’s a really important moment because that will set out the bills that are going to be expected in this Parliament, the legislative agenda, and the commitments that the Parliament will try to achieve in their time. And, at the moment, summer recess on 23 July is pencilled in, so only two weeks of work and then they go off on holiday. But that might change to push for an early emergency Budget, so there’s a question mark on that.
And then 1 September, the parliamentary recess ends and we’ll see a lot of activity, quite a hive of activity, with a possible emergency Budget, a possible spending review and of course the all-important Bank of England’s September Monetary Policy Committee, which might be taken as the first commentary around the economy and what it means with the new government in seat.
And then we rush through to conference season in late September, early October. And, of course, the all-important November presidential elections on 5 November. So, a very busy parliamentary timetable ahead.
HP: Thank you for setting out the timetable. That gives us some context and some key points for us to follow. Let’s get into some of the detail. So, what are the key policies or issues being hotly debated during the course of this election period so far?
SF: There’s a lot going on and, like I said, tomorrow’s 4 June first TV debate is expected to be quite a lively one. The key topics of voters going into this election: the economy, not a surprise, immigration, will a plane take off for Rwanda, question mark, the NHS waiting list seems to be the top of the debates, and defence spending. And we’ve seen announcements already on all four of those topics, and we see more to come.
But perhaps if I touch on one that will be particularly of interest to listeners, I expect, is certainly the changes to the taxation of non-UK-domiciled individuals. So, you’ll remember that in the spring Budget, the Conservative government announced some changes to take effect on the tax year starting 2025, and that’s basically to change the regime for non-UK-domiciled individuals, where once you’ve lived here for four years, you’re expected to start paying tax.
Labour has come out and effectively extended that or boxed it up for want of a better word. They’ve committed to tax non-domiciled residents more effectively, they say, including the scope of inheritance tax, making the proposed changes come in quicker. So, while I think there was a tapering arrangement proposed in the spring Budget that we expect to see that sort of move at a quicker pace. And potential carried-interest changes, which they haven’t released the detail of as yet but, interestingly actually, both parties haven’t released a lot of detail in terms of election commitments, because we are still awaiting the all-important manifestos, and we’re expecting them to be published any time in the next two weeks. There’s still a lot to come in terms of those details.
The other one that we probably might see play out, particularly for the Labour Party, is more of an internal fight, so to speak, or internal argument around labour law. So, there is a lot that Labour have already announced in what they call their plan to make work pay. But we see there that actually the Labour base are already sort of having a lot of concern or a lot of discussion around what exactly those policies might mean. So, await with bated breath for the manifestos, because those are the official commitments that all parties will take into if they form government.
HP: Well, thank you, Sonia, for your insight today. It’s certainly set to be an interesting few weeks as the campaign period plays out and markets start to consider the possible impact of a new government and those potential policy changes.
Let’s move back to markets and what we should expect this week. Well, after nine months of keeping rates on hold, we expect the European Central Bank to embark upon its rate-cutting cycle at its meeting on Thursday. We anticipate a 25-basis point reduction across its policy rates, thereby reducing the deposit rate to 3.75% and the main refinancing rate down to 4.75%. We should remember this would represent the first reduction that we’ve seen since 2019.
Now, the Governing Council’s rationale is likely to be driven by the fact that we’ve seen stronger than expected recovery in activity in Europe, and increased confidence that inflation will, indeed, return back to the targeted level.
In terms of the economic outlook, first-quarter growth in Europe was positive and the leading indicators have been encouraging. If you look at the composite purchasing managers’ index, it hit 52.3 in May, helped by a recovery in the manufacturing and expanding services sector. Meanwhile, the unemployment rate continues to hover around its historic low of 6.5%.
In terms of inflation, well, price pressures have been easing over the course of the past year, although we did see the fact that headline inflation in May ticked up to 2.6% year on year from that 2.4% in April, whilst core CPI, which as we know excludes the volatile items including energy and food, rose to 2.9% year on year. The increase has been driven by services inflation, but we don’t think that will be enough to dissuade the central bank from cutting rates.
Looking forward, a mixture of soft core goods inflation and lower energy prices has encouraged us to reduce our headline inflation projection, which now stands to average 2.3% during the course of 2024, 2.1% in 2025.
Moving beyond the June meeting, we forecast quarter-point cuts in rates in September and December. In addition, we expect to see a further 75-basis point cuts during the course of next year. That would take the deposit rate down to 2.5% by the time that we finish 2025.
Now, the big datapoint of this week will, of course, come on Friday in the form of the US employment report, where we expect the US economy created 200,000 jobs during the course of May, which will be slightly faster than the 175,000 jobs that were registered during the course of April. We project that average hourly earnings will increase by three-tenths of 1% month on month, or 3.9% year on year. We forecast the unemployment rate will hold steady at 3.9%. We also look for a slight improvement in the participation rate.
Whilst we would expect the US labour market to weaken further during the course of the coming months, we still expect US unemployment to peak at just 4%, which still remains pretty low by historic standards.
So, with that, we’d like to thank you once again for joining us. I hope that 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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