21 July 2026: Reeves leaves the Cabinet

Andy Burnham was confirmed as the new Prime Minister yesterday after a meeting with the King.

Burnham is the country’s seventh Prime Minister since the Brexit referendum in 2016.

After a speech outside 10 Downing Street, which was long on rhetoric but lacked policy “meat on the bones”, he promised to deliver a ten-year plan by the end of the year to take the country from where it is now to where he believes it should be, with stronger growth and a more equitable social care system. His first undertaking, he told reporters, was to eliminate rough sleeping within those ten years completely.

Rachel Reeves was dismissed as Chancellor of the Exchequer. It is understood that she was offered another Cabinet position by the Prime Minister but declined; the same applies to David Lammy, the former Foreign Secretary. Former Defence Secretary John Healey and ex-Energy Minister Ed Miliband have replaced them.

Burnham fired Reeves in the early afternoon, shortly after he officially took power.

The BBC reported that Ms Reeves was offered a “big job” within Burnham’s cabinet but declined.

Burnham has said he will use "any flexibility" in the government's fiscal rules, a move that could allow him to borrow billions of pounds to invest in infrastructure. Experts have said Burnham could raise an extra £16 billion for infrastructure after a change in the definition of public debt in the rules.

The National Wealth Fund and other financial institutions can make loans or buy stakes in companies without affecting the public debt target. Burnham said: "I've said we'll stick to the fiscal rules and by that I mean the existing fiscal rules and use obviously any flexibility within them. "But we will stick to the existing rules, and I've made that very clear to my colleagues. So none of this is about taking risks with the economy. I've never done that in any role that I've had."

Burnham has opened the door to a manifesto-busting tax hike in a bid to shore up the “difficult” state of the public finances.

The new Prime Minister has already refused to rule out bringing back the 50p top rate of tax to ease financial pressures on low earners and pensioners.

His intervention came just after he arrived at Downing Street, having vowed to give people some breathing space as they grapple with high bills.

But the Labour manifesto says the party will not raise income tax, VAT or national insurance. Should he attempt to introduce legislation this Autumn that veers widely from Labour’s manifesto commitment not to raise those basic taxes, he will face renewed calls for a General Election from opposition parties in Parliament.

With Parliament in recess, Burnham will make a series of policy speeches in the coming days and weeks as he gets down to the task of driving the country and its economy forward.

The pound rose modestly yesterday, gaining against the US dollar, the euro, and the yen, according to market practitioners. The move was driven by lower UK fiscal risk and relatively calm political transition dynamics.

Fed Chairman Kevin Warsh may try to ignore Wall Street, but the evidence from his first weeks as Fed Chair shows that markets will not let him. His push for a stripped-down, opaque, Greenspan-style Fed has already produced sharp volatility, misinterpretation of policy signals, and forced Wall Street to adapt by using AI and new analytics. In practice, he can reduce communication, but he cannot escape the market’s reaction.

Wall Street will not sit still under Warsh’s tight-lipped, low-guidance Fed. Based on current reporting, firms are already shifting to a new playbook centred on AI-driven decoding, volatility hedging, and deeper macro-modelling. Markets cannot function without expectations, so if Warsh won’t provide them, Wall Street will manufacture its own.

U.S. Leading Indicators slipped again in June, reinforcing the picture of a cooling, but not collapsing, economic outlook. The decline keeps the index in negative territory for a seventeenth straight month, a historically reliable warning sign that forward momentum is weakening beneath the surface, even as headline GDP remains resilient.

The Leading Economic Index is designed to look 6–9 months ahead. Historically, persistent declines often precede slower GDP growth, but recessions typically require a deeper, more broad-based deterioration.

Right now, the signal is: Growth is slowing, not collapsing. The Conference Board itself expects GDP growth to cool in Q3/Q4, consumer spending to soften, and the labour market to gradually lose momentum.

A softer LEI supports the case for no near-term Fed hikes, especially under Warsh’s “data-first, guidance-light” regime, while Treasury yields may drift lower at the long end if growth expectations continue to fade.

AI could drive US unemployment from 4% to 15%, gutting the 80% of federal tax revenue that comes from individual income taxes, according to Goldman Sachs.

It estimates 15 million AI-driven layoffs, pushing unemployment halfway between the peaks of the Great Recession and the Great Depression. Even hundreds of billions in AI company profits cannot offset the federal revenue shortfall needed to fund a $7 trillion government.

Current theory goes something like this: AI does not take over the world from humans. It destroys jobs, but over time, they are replaced by new jobs that complement AI's strengths. Most of those that remain are service jobs, such as medical personnel, waiters, and those in an advisory capacity.

In the meantime, unemployment is rising across many job categories, including bank tellers, drivers, and software programmers.

The antidote to this tax apocalypse is that AI companies could pay a large percentage of their profits to the government to cover the cost of lost jobs. However, that does not necessarily cover the loss of tax revenue. Even if AI revenue runs into the hundreds of billions of dollars, its profits will likely not be large enough to offset the plunge in federal tax revenue.

Under a President like Donald Trump, the choice between corporate profits and social issues such as joblessness will be an easy one. He would likely dwell on the success of corporate America while doing his best to ignore the “barbarians” at the gates of the White House.

The dollar index gained marginally yesterday as the market slipped quietly into holiday mode. Volatility is likely to fall over the next 6-8 weeks, although a general lack of liquidity could amplify any upswing in activity around Iran and the Strait of Hormuz.

The European Central Bank, in its latest survey on the availability of financing for companies in the second quarter of 2026, found that bank lending conditions in the Eurozone continue to tighten, indicating that the financing environment remains more difficult for companies despite stable medium-term inflation expectations.

The survey results showed that the share of companies reporting higher loan interest rates rose to 42% in the second quarter, up from 26% in the first, reflecting the continued pass-through of monetary policy effects to borrowing costs. Meanwhile, 31% of companies reported higher other financing costs, such as fees and commissions. However, this was lower than the 37% recorded in the previous quarter, suggesting a relative decline in some burdens not directly linked to interest rates.

The ECB clarified that companies participating in the survey considered general economic expectations the most negative influence on the availability of external financing, amid ongoing uncertainty over the Eurozone economy. Companies also noted that the ongoing conflict in the Middle East poses an additional challenge, given its risks to supply chains, energy prices, and investor confidence.

Despite these pressures, the survey indicated that companies' inflation expectations remained largely stable compared with the first quarter, averaging 3% over a one-year and three-year horizon, while slightly rising to 3.1% over a five-year horizon, reflecting continued expectations of prices above the European Central Bank’s target of 2%.

While the report provides insight into current corporate thinking, it does not consider the Central Bank’s likely response to inflation remaining substantially above target for such an extended period.

German two-year government bond yields reversed earlier gains yesterday, tracking swings in oil prices, while markets have fully priced in two additional ECB rate hikes by early 2027.

Investors have been weighing the risk that rising energy costs could rekindle inflation and strengthen the case for further European Central Bank tightening. Oil prices were steady, pulling back from earlier highs as hopes of renewed U.S.-Iran negotiations were countered by the Houthis’ declaration of a naval blockade against Saudi Arabia. Germany’s 2-year yields, more sensitive to policy-rate expectations, were down one basis point at 2.77%, after reaching 2.8174%, their highest level since July 2024.

Money markets indicated the ECB deposit rate at 2.66% in December and 2.73% in February 2027, from the current 2.25%. They also fully priced a rate hike in September.

Analysts noted that the tight correlation between oil prices and the euro front-end, a dynamic that dominated market moves throughout March, April and May, has resurfaced in recent trading. Germany’s 10-year government bond yield, the euro area’s benchmark, was up 1 bp at 3.13%. It reached 3.20% in mid-May, its highest level since May 2011.

More tangible evidence of a further slowdown in the German economy comes from concerns over the water level in the River Rhine, which is used by a multitude of German industries.

Rhine water levels fell sharply in mid-July, threatening cargo transport and raising fresh risks to Germany’s industrial rebound. If levels continue to decline, the disruption could echo the 2018 slowdown, when Rhine bottlenecks shaved 0.4–0.5 percentage points from German GDP.

The Rhine is Germany’s industrial artery. It carries: chemicals (BASF, Bayer), coal and other energy inputs, steel and metals, automotive components, and agricultural goods.

When water levels fall, barges carry less cargo, shipping costs rise, delivery times lengthen, and factories face input shortages.

The Rhine should be viewed in the same context as the U.S. road system and the Australian railways.

The euro slipped yesterday, recording modest declines against the pound and the dollar. The move reflects a mix of energy-related pressures, logistics disruptions in Europe, and pre-ECB-meeting caution.

The common currency fell to a low of 1.1402 and closed at 1.1414.

Have a great day!