18 June 2024: Minimum wage increase hitting hiring


  • The economy is weakening under the weight of inflation
  • Retail sales will provide a guide to the prospect of a Goldilocks scenario
  • The ECB is in no hurry to discuss the “French crisis”
GBP – Market Commentary

Reform makes pledges that are populist but unfunded

Nigel Farage’s Reform Party published its manifesto for the election yesterday, and it was at once torn to shreds as a “work of fiction” by the other Parties. On taxation, the NHS, defence and immigration, Reform’s policies are designed to be populist without too much concern about whether they are affordable or deliverable.

One commentator described Reform’s “contract”, Farage believes that the term “manifesto” has been devalued, as “a turbocharged version of Liz Truss.”

While Labour appears determined to consider Reform as little more than a sideshow, the Conservatives, despite their bluster about a vote for Reform, make a Labour victory more likely and are genuinely concerned about Reform’s rise.

HSBC boosted the Conservatives campaign yesterday by endorsing several of the claims made by Rishi Sunak and his colleagues.

The banking giant warned that Labour’s plans for a “genuine living wage” will push up employment costs, driving inflation up and employment down.

The stark warning from HSBC comes just days after the Labour leader pledged to bring in a “New Deal for Working People” within his first 100 days in power if elected next month.

As the economy struggles to find any growth during the second quarter, the Bank of England faces growing pressure to cut interest rates. Andrew Bailey’s comment about inflation not needing to reach the Bank’s 2% target before cuts begin is returning to haunt him.

While the Fed still has the “luxury” of being patient since the American economy continues to perform well, the MPC doesn’t have the same comfort.

Bailey is acutely aware of the need for the Bank to be apolitical and has also expressed concerns in the past about a perceived threat to its independence from a change in Government.

Although Shadow Chancellor Rachel Reeves has not specifically mentioned any changes being considered to the makeup of the MPC if (when) she becomes Chancellor, there remains the implied threat of a treasury official being co-opted onto the decision-making committee.

Yesterday, the pound gained a little respite from the selling pressure the dollar’s recent strength has driven. It rallied to a high of 1.2709, closing at 1.2705.

USD – Market Commentary

Several Fed officials will speak to reporters this week

Following the most recent FOMC meeting at which its members voted to leave interest rates unchanged, several Fed officials are also due to speak throughout the week, including New York Fed President John Williams, Minneapolis Fed President Neel Kashkari, San Francisco Fed President Mary Daly and Richmond Fed President Thomas Barkin.

Austen Goolsbee, the Chicago Fed President, kicked off the “FOMC Show” on Friday, expressing some relief that price pressures appear to be beginning to abate.

Jerome Powell prides himself on his ability to ignore outside influences, but he must have been privately pleased by the comment released by Bank of America yesterday that the economy still is on a path to a soft landing.

In a note to clients, analysts at Bank of America Securities said the “best-case scenario” for the U.S. economy “has played out,” with consumer price growth softer than expected and the latest jobs report pointing to resilience in labour demand.

The latest retail sales data, which is due to be published later today, is expected to show that the consumer has not been put off spending.

Several commentators have recently voiced concerns that the consumer is no longer willing to “bail out” the Fed since inflation is not falling despite their having to pay higher interest rates on their mortgages and credit cards.

Continual questions are being asked about the strength or otherwise of the economy. This suits the Fed since historically it likes to keep the market “off balance”.

The bulls see AI and the growth in major infrastructure projects nationally as signs of an economy that has the potential to continue to grow, while the bears point to ballooning public and consumer debt as an anchor on the economy which will eventually drag it down.

The balancing factor will be, as it often is, job creation. Every month the naysayers believe that the economy cannot continue creating 200k or more new jobs, and every month for almost two years it has done just that or come close.

The Fed is gambling on job growth continuing to grow without the need for the stimulation that a rate cut would provide, banking on inflation continuing to fall to it to cut rates.

The dollar index “took a breather” yesterday but stayed within its uptrend. It fell to a low of 105.31 and closed at 105.33.

EUR – Market Commentary

The bond market is not (yet) disorderly – Lane

Ten years ago, Jordan Bardella was a teenager playing video games on his computer. Now he is on the verge of becoming France’s youngest-ever Prime Minister by a considerable distance.

After a two-round legislative election on June 30th and July 7th, his party could win enough seats to form a government. The ascent of Marine Le Pen’s young protégé from obscurity to the cusp of high office is one of the more improbable in modern French politics.

There is now a serious possibility that the hard right, or possibly the hard left, will win the upcoming election.

Marine le Pen’s National Rally Party is ahead in the polls, but French voters are notoriously fickle and that could change in the time left before the election.

In contrast to the UK, the main Parties are concentrating on their policies to revive the French economy, possibly because their manifestos are so diverse from each other.

Following the success of right-leaning parties in the European Parliamentary Elections recently, a hard right Prime Minister in Italy may well be joined by a French PM with similar views.

Although this is being seen as a revolution of sorts against the policies, particularly over immigration that are being passed in Brussels, there is a growing hunger for change that is permeating the entire European Union, despite the hard-right still being a small noisy minority.

Philip Lane, the ECB’’s Chief Economist, is still unmoved by the growing crisis in the French Financial Market. It is typical of the ECB that they ignore what they see as a small, but growing, issue until it becomes a full-blown crisis.

French financial markets endured a brutal sell-off late last week as investors cut their positions ahead of the election. However, Lane said the latest market moves did not fulfil one of the key conditions for ECB intervention – that a rise in risk premiums is disorderly and unwarranted.

One of the most significant reasons for the ECB not to cut interest rates recently was the growth of hourly labour costs. Uncharacteristically, the ECB’s Governing Council “took a chance” on these costs declining in the first quarter. That gamble has not paid off, with labour costs growing by 5.1% in the first quarter, up from 3.6% in the fourth quarter of 2023. This will ensure that there will be an extended gap between the first and second rate cuts.

The euro managed to claw back almost all its losses from Friday as traders cut long dollar positions as the Greenback looked overbought on short-term charts. This has likely given Euro bears a chance to enter the market at a more advantageous level.

The single currency rose to a high of 1.0737 and closed at 1.0734.

Have a great day!

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Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.