6 May 2025: Time for the first major Cabinet reshuffle

The by-election held in Runcorn last week, as well as the local council and mayoral elections held simultaneously, were an unmitigated disaster for the two main political parties.

The Conservatives' results were not unexpected. They are still reeling from the General election held last July, and it may well take a decade before they can be considered genuine contenders for Government.

For Labour the results, particularly, the by-election result, gave a clear indication of two things; first that the electorate is far from impressed by the measures that have been introduced in the past ten months, which are reckoned to have unfairly targeted those sectors of the public least able to protect themselves, and second, the results showed a change in the political landscape the like of which has not been seen for more than eighty years.

A Prime Minister would be expected to react to such a mauling by making significant changes to his “top team”. However, the number one candidate to lose their job is someone who appears “bulletproof.”

Rachel Reeves has been unpopular with the public since even before she took office. Her constant hand-wringing excuses that nothing is her fault and that she was left with no alternative but to blame the previous Government has jarred with ordinary people, while her removal of the pensioners’ winter full payment from all but the most needy is considered nothing short of miserly.

That having been said, Keir Starmer sees her, along with Angela Rayner, as the architects of Labour’s economic strategy. Both appear to be followed by a whiff of controversy, and in normal circumstances, they would both be fearing for their political lives, but when he looks around his Party, Starmer doesn’t see anyone capable of improving the situation.

So, it is likely that some minor changes will be made to the Cabinet, with the main jobs of Deputy Prime Minister, Chancellor, and Home Secretary remaining unscathed. The most senior casualty is expected to be Ed Miliband, who has made a complete hash of convincing the public to agree with the net-zero policy.

The Bank of England’s Monetary Policy Committee will meet later this week. It will be a close call whether the base rate of interest will be cut. Several economists are expecting rates to be reduced by 0.25 percentage points on Thursday as the Bank digests the impact of US tariffs on the economy.

It comes after the Bank of England held interest rates at 4.5% at its last decision meeting on Thursday, March 20, as policymakers faced a 'fog of uncertainty' over Donald Trump's developing tariff policy and upcoming UK tax rises.

Sandra Horsfield, an economist for Investec, believes it is a “near-certainty” that borrowing costs will be eased further with a cut to interest rates, with most participants in the financial markets pricing in a cut.

Inflation has fallen in recent months, which is likely to indicate to policymakers that interest rates, which are used to control inflation, can continue to come down.

Consumer Prices Index (CPI) inflation slowed to 2.6% in March, from 2.8% in February, according to the latest official data.

The pound spiked to a high of 1.3339 yesterday but lost ground into the U.S. opening as liquidity improved and closed at 1.3295.

When one sees an American car on a UK road, it draws attention not due to its superior styling, since it is not a Rolls-Royce, a Bentley or an Aston Martin, it draws attention due to its novelty value. Similarly, when a small business owner decides it's time to change his vehicle, often when it has given him years of trouble-free service, his first thought is not to consider a U.S.-built truck; he wants the reliability of a Toyota or Nissan.

Donald Trump’s use of sledgehammer all-or-nothing tactics to force the rest of the world to accept his target of “Make America Great Again” is fundamentally flawed.

The job of bringing together the world’s largest consumer with the world’s greatest supplier, together with nine of its major suppliers, is fundamentally flawed. First, it will take a generation for attitudes to change in America. Second, China will need to abandon its drive for industrialisation, which would create havoc among its population of close to 1.5 billion people. Third, Americans like buying Chinese products, as well as Japanese and Korean ones, too.

The FOMC will begin its latest meeting today, with a decision on interest rate scheduled to be delivered tomorrow evening UK time. Given the fact that Fed Chairman Jerome Powell and his colleagues on the rate-setting committee are using Personal Consumption Expenditures as their measure of inflation and monthly job creation figures as their measure of economic health, the result can be reasonably expected to be no change.

Powell has been under severe pressure from President Trump to cut rates as a pre-emptive measure to deal with a slowing economy. GDP decreased in the first quarter for the first time since early 2022. Although this is not a direct result of Trump’s economic policies, the stockpiling of imported goods in anticipation of the tariffs that were announced in early April has been a factor.

Trump will be concerned that his actions will be seen as a reason the economy falls into a technical recession following the second quarter’s results, just as he decides on the imposition of tariffs almost at the end of the quarter.

Trump probably said it best last week as the stock market swooned when the government reported a surprising economic contraction in the first quarter: “This is Biden’s Stock Market.”

By Friday, it had jumped back, recovering the ground it had lost after Trump pummelled the world with tariffs on “Liberation Day,” April 2. The S&P 500 is now down only 5.2% since Trump’s inauguration and 1.7% since Election Day last November.

This is largely because the economy is still pretty much President Joe Biden’s, driven by the same dynamics underlying the growth that came during the second half of his administration, as the Federal Reserve steered the economy toward a soft landing from a bout of high inflation in 2022.

It would take a significant reversal of the FOMC’s attitude to its growth and employment mandate for rates to be cut this week.

The dollar index is still unable to break above 100, given the uncertainty that remains regarding the economy. Yesterday, it reached a high of 100.03 and closed at 99.83.

The Eurozone economy grew by 0.4% in the first quarter of the year. Economists expected it to have grown by 0.3%. As my mother would have said, “We must be grateful for small mercies!”

The Hawks and doves on the ECB’s Governing Council would have had vastly different views on the data. The hawks believe that it is time for the Central Bank to pause after eight consecutive meetings when tares have been cut, while the doves see interest rates at 2.25% as being at the top of the “neutral range”, and one further cut will be needed.

However, in the hawks’ favour, price pressures in the eurozone exceeded expectations in April, raising fresh challenges over the disinflation trend and potentially complicating the European Central Bank’s (ECB) roadmap to lower interest rates further in the coming months.

According to preliminary data released on Friday by Eurostat, consumer prices rose by 2.2% year-on-year, unchanged from a month earlier, but above the forecast.

However, in the doves' favour, the improvement in GDP growth precedes President Trump’s threatened imposition of swingeing tariffs on European exports to the U.S.

The hawks will also report that core CPI, which excludes food, alcohol and tobacco prices and energy prices, rebounded 1.0% in the eurozone in April relative to March, while year-on-year it rose 2.7% (2.4% in March), slightly above the 2.5% expected by analysts.

The rebound in core inflation in April, driven especially by the new acceleration in the year-on-year growth rate of services and non-energy industrial goods prices, has pleased the members of the ECB’s Governing Council, as it implies that the disinflationary process has come to a halt in April, which could condition further cuts in the region’s benchmark interest rates, which the markets take for granted.

The conservatives of Germany's designated Chancellor Friedrich Merz and the centre-left Social Democrats formally signed their coalition contract on Monday, on the eve of launching their new government.

The conservatives of Germany's designated chancellor, Friedrich Merz and the centre-left Social Democrats formally signed their coalition contract on Monday, on the eve of launching their new government.

Merz, 69, is set to be sworn in as the new leader of Europe's biggest economy later today, ending half a year of political paralysis in Berlin.

The CDU/CSU alliance of Merz and their future junior partners, the Social Democrats, have vowed to revive the ailing economy and rebuild the military at a time when US President Donald Trump has cast doubt on the future of transatlantic security and trade ties.

Merz has also vowed to curb irregular migration and halt the rise of the anti-immigration Alternative für Germany party, which took second place in February's snap general election.

The Euro has begun a week that will be dominated by interest rate decisions in the U.S. and the UK quietly. It ranged between 1.1360 and 1.1310 yesterday, closing at 1.1318.

Have a great day!