13 May 2025: Labour continues to avoid targets

Labour’s first year in government is likely to be characterised by its desire to tackle the country's issues, but taking ill-conceived decisions on what needs to be done.

Several high-profile examples include the removal of the winter fuel allowance for pensioners, the changes to inheritance tax, which have hit the country’s farming community particularly hard, and now the reform of the immigration system, which risks devastation of the care system.

During last year’s election campaign, Sir Keir Starmer told voters he had five milestones on which he wanted to be judged.

Immigration didn't even make the list!

Now, ten months after being elected, he is reacting to the devastation being wrought by Reform UK by making policy changes more akin to a hard right rather than a centre-left Government.

Starmer faces a revolt from the left of his Party by telling the press conference he held yesterday that the UK risks becoming “an island of strangers” rather than a unified country “, marching forward together.”

Starmer put forward several sensible proposals, but the removal of the care work visa means that the adult social care system, which is already on its knees, faces total devastation.

It is estimated that there are currently approaching 150k vacancies for care jobs in England alone, and the majority of those are expected to be filled by individuals coming from overseas.

Starmer has said that he wants to bring down the net migration figure, which is the difference between the total number of legal migrants coming to the country each year, less the number leaving, down, but studiously avoided giving himself a target on which he can be judged.

It is presumed that the shortfall can be filled by those of working age who have taken themselves out of the economy since the end of the Pandemic, but there will need to be major changes, not least to the funding available to make the required changes, all of which lead in the same direction; higher taxes.

It is impossible to estimate the damage that the rise of Reform UK has brought to UK politics, with the potential to cause as much havoc as the hard-left trade union-driven Labour Party of the seventies and eighties.

In announcing his new package of measures on migration, the Prime Minister has been keen to avoid putting a target on just how far net migration would indeed fall.

This is understandable in many ways. Previously, targets have been announced and not met. And the public simply doesn’t believe such ambitions. The judgment has presumably been made that it is better to show a reduction than talk about a specific one.

There may also be a secondary, and economic, reason why Sir Keir Starmer and other ministers are avoiding committing to a specific target. Thanks to the way the Office for Budget Responsibility assesses these things, if they did set a specific target, it could cost them billions of pounds of fiscal headroom, leading to tax rises in the autumn.

The announcement of a truce in the developing trade war between the U.S. and China may lead to a lessening of the uncertainty that has surrounded the financial markets since the first week of April.

The dollar has recovered, and yesterday it rallied versus Sterling, reaching a high of 1.3141 before settling back to close at 1.3190.

The U.S. and China held high-profile talks in Switzerland over the weekend, which have brought about a truce in the tit-for-tat measures each has introduced on the other's goods, which had meant that trade between the world's two largest economies had come close to grinding to a halt.

The increase of tariffs on goods travelling to the U.S. from China to 140% had meant that it had become impossible for importers to do business.

The U.S.-China trade deal announced in Geneva early Monday far exceeded Wall Street expectations, with both countries slashing tariffs. The S&P 500 jumped to its highest level since March 5, nearly a month before the imposition of reciprocal tariffs sent markets plunging and set in motion a test of wills between President Donald Trump and Chinese President Xi Jinping. Amazon, whose marketplace depends on Chinese imports, was among the top-performing S&P 500 stocks.

The deal announced yesterday essentially gives China the same deal that the U.S. gave to every other country on April 9, temporarily reducing reciprocal tariffs to 10% during a 90-day negotiation period.

We're back to where things would have been on April 9. A 20% tariff imposed in February and March for China's role in the fentanyl trade remains in place, as does a 10% reciprocal tariff.

Beijing also agreed to unwind its retaliatory measures since April 2, except for a 10% tariff on all goods.

The 90-day cooling-off period will provide a big enough window to revive cargo shipments from China and keep shelves stocked, making recession unlikely.

In the wake of the U.S.-China trade deal, the 10-year Treasury yield jumped six basis points to 4.44%, a one-month high. Meanwhile, markets are pricing in a longer pause before the Federal Reserve resumes rate cuts. Odds of a rate cut at the July 30 Fed meeting fell to 39% from 60% on Friday.

Markets are essentially pricing in one fewer rate cut this year. Odds of 75 basis points in rate cuts this year have fallen to 39% from 57.5% on Friday.

Federal Reserve Chairman Jerome Powell said last week he needed 'further clarity on tariffs' before moving on interest rates. While yesterday’s announcement is undoubtedly good news for the markets, the uncertainty goes on.

What mood will Trump be in at the end of a further 90-day cooling-off period? Has he now reached the point when he has achieved what he set out to do on April 2nd?

Trump and his administration thrive on the chaos they have brought since he was re-elected last November. It is impossible to gauge what he will do next as he looks at ways in which to drive his “MAGA” campaign forward.

The dollar index rallied to a high of 101.96 but fell back to close at 101.54.

ECB Governing Council Member and the Bank's “resident hawk”, Isabel Schnabel, has been fairly subdued recently as the Bank has embarked on a significant path of cutting interest rates.

Isabel Schnabel said yesterday that the European Central Bank should stop cutting borrowing costs. Turmoil in the global economy is fuelling price pressures, and inflation is at risk of exceeding the bank's 2% target in the medium term. The ECB cut interest rates seven times in the past year as inflation has been rapidly retreating, and policymakers have already laid the groundwork for another cut on June 5, taking the deposit rate to 2%.

Schnabel, an outspoken policy hawk, shattered those expectations, explicitly arguing for keeping rates unchanged since they are already low enough not to hold back the economy.

"Now is the time to keep a steady hand," Schnabel told a conference at Stanford University. "The appropriate course of action is to keep rates close to where they are today, that is, firmly in neutral territory."

The complication for policymakers is that short-term and medium-term inflationary forces are quite different.

In the near term, inflation could well dip below the ECB's 2% target given lower energy costs, a strong euro, anaemic economic growth and high uncertainty created by the US administration's trade war, Schnabel argued.

But monetary policy affects the economy with long lags, and by the time further policy easing impacts the economy, the drag on inflation may have faded, replaced by quite different forces that push up costs, she argued.

Inflation could be boosted by an expected government spending surge, driven by Germany's pledge to boost defence and infrastructure investment. But more importantly, trade fragmentation, a byproduct of US-imposed tariffs, could also push up costs and boost prices.

The uncertainty caused by Donald Trump’s economic and trade policies has the potential to drive the global economy to levels that have not even been considered yet.

"Over the medium term, risks to euro area inflation are likely tilted to the upside, reflecting both the increase in fiscal spending and the risks of renewed cost-push shocks from tariffs propagating through global value chains,"

"Even if the EU does not retaliate, higher production costs transmitted through global value chains could more than offset the disinflationary pressure coming from lower foreign demand, making tariffs inflationary overall," Schnabel argued. Retaliation, as already outlined by the bloc, would only magnify this process and keep pressure on prices further out.

Given the deal agreed by the U.S. and China, it does feel like Trump’s actions since April 2nd have been designed to bring the country’s major trading partners, of which the European Union is one, to the negotiating table. It is not difficult to imagine that with the UK and China settled, at least for now, Brussels will be the next cab off the rank.

The euro lost ground as the deal between the U.S. and China was agreed. It fell to a low of 1.1080 and closed at 1.1114.

Have a great day!