Leadership favourite finally opens up

Former Foreign Secretary Boris Johnson finally launched his leadership campaign yesterday and quickly showed why he is the favourite to replace Theresa May as Prime Minister.

The most charismatic of the contenders, Johnson, who had been unusually reticent to speak recently, laid out his views on Brexit but gave away very little about how he expects to achieve them. He said that he is not trying to force a no-deal Brexit but believes that it should remain an option.

Johnson’s campaign was always likely to be more about the character and personality of the man than any policy initiatives as he showed why he can reach voters which his Party has traditionally struggled to attract. He dealt with negative observations and criticism of his methods by pointing to his Mayoral victories in London and showed an ability to act spontaneously that other candidates have lacked.

The first ballot on the new leader will take place today following yesterday’s motion by the Opposition, to ensure that a no-deal Brexit cannot happen, was defeated by MPs.

The ballot will see the field narrowed down, possibly considerably, as the real views of MPs become clear. The result of the first ballot will be announced at around 1 PM.

Sterling fell back below the 1.2700 level versus the dollar yesterday although it remains in a relatively narrow corridor which could change later today. It fell to a low of 1.2681, closing at 1.2690 as it retraced the gains made on Tuesday following stronger than expected employment data.

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Draghi concerned over vehicle tariffs on Eurozone manufacturers

ECB president Mario Draghi spoke at a conference yesterday of his concerns over the direction that global trade is taking as tariffs and protectionism threaten globalization.

The changes that have come to the European Union as it has developed into a political, economic, and the trading bloc have left it exposed to disruptions to global trade if they coincide with a lack of activity within the group. Some of the “smaller” economies such as Poland, Slovenia and Romania where vehicle manufacturing is a major part of the economy are now particularly exposed to U.S. threats over vehicle imports from the EU.

Being partnered with larger countries like Germany has many advantages for these countries but where Germany can withstand greater tariffs on vehicles manufactured totally within its borders, those who are only a part of a wider process cannot. They face the removal of production from their country with a devastating effect on the economy.

Draghi was joined by IMF Managing Director Christine Lagarde in voicing concerns over protectionism but for the EU it is the reality of the continued aftermath of the financial crisis which is defining business investment.

The levels of debt in the corporate sector coupled with bad loans which remain on bank’s balance sheets are the most pressing matters for the ECB. Yet, the bank continues to look for a solution in the global economy when the answers, however painful, are to be found at home.

Industrial production data is due for release this morning and the market is braced for more bad news. A fall from last month’s 0.3% contraction to a 0.5% or even 0.7% fall could see the single currency’s depreciation accelerate.

Yesterday, the euro fell to a low of 1.1282, closing at 1.1287 versus a stronger dollar.

Lower inflation supports rate cut expectations

Yesterday’s release of consumer price data for the U.S. added further evidence to the expectation that the Federal Reserve will cut short-term interest rates in the coming months.

While there is little doubt that the economy is slowing, there is no evidence, yet, that the slowdown will mark any more than a trough in activity which requires attention rather than major surgery.

CPI fell to 2% year on year in May from 2.1% in April. While this is not the Fed’s favoured measure of inflation given its narrow “basket” of good and services, the financial markets see it as a reliable barometer which is able to be constantly updated.

Retail sales data will be released tomorrow along with industrial production and capacity utilization. With employment data highly erratic over the past couple of months, just how the consumer has been affected can be seen by how much they are prepared to spend. Analysts believe that a recovery from April’s flat return can be expected.

Each data release provides a further piece in the jigsaw which makes a rate cut more likely.

Next week’s FOMC meeting will be too soon as Jerome Powell and his colleagues will want to see further evidence of the extent of the slowdown. He will, however, most probably prepare the markets for the move and traders will study his words carefully to gauge when the cut will happen.

Yesterday the dollar regained signs of strength, the index reached 97.02, closing at 97.00.