5 July 2024: Starmer to be the new Prime Minister


  • A Labour Landslide
  • Economists are content with a gradual slowdown
  • Political turmoil may “sink” the French economy
GBP – Market Commentary

Labour set to command a majority of between 170 and 200

The General Election has, as expected, gone the way of the Labour Party. with massive swings against the Conservative Party recorded in several constituencies.

In the run-up to polling. Sir Keir Starmer, now Prime Minister-elect, warned about complacency and asked voters to go out and vote if they wanted change. In the event, the overall turnout is expected to be around 56%, making it the lowest turnout since 2006.

The most significant results so far (4.00 am) are wins for Labour right across Scotland, with the Scottish National Party suffering badly while individually, Grant Shapps, a long-standing MP and Minister has lost his seat.

Nigel Farage won Clacton for Reform UK and will take his seat in Parliament at the eighth time of asking. Iain Duncan Smith retained his seat which was a testament to the individual rather than his Party. At the same time, former Labour Leader, Jeremy Corbyn won Islington North as an Independent increasing his majority.

Almost the entire shadow cabinet has been re-elected, making Starmer’s job of handing out ministerial roles much easier. His Deputy, Angela Rayner, increased her majority, while Rachel Reeves is set to become the first female Chancellor of the Exchequer.

Rayner spoke of a decade of Socialist Government to come, with a strong set of policies and a mandate to carry them out. The question now is who will lead the Conservatives into Opposition, and will they have the stomach for the fight to perform the same level of structural change that Labour has gone through since 2019?

Fighting the inevitable number of by-elections over the next five years before Labour has to ask the public to renew its mandate will seem soul-destroying to the new crop of right-wing candidates, but it is a task they will have to take on if their Party is not to be swallowed up by Reform, whose far-right agenda may strike a chord with voters depending on the performance of Labour in Government.

The economic outcome of the election appears to be positive, certainly while the Labour Party enjoys what is likely to be an extended honeymoon period.

Only if they fall back into their old wages of higher taxation and borrowing to shore up the NHS and a multitude of other public services will they lose the momentum that have gained in traditionally Conservative constituencies.

The Pound has so far reacted positively to the results that have been declared.

Yesterday, it gained for the sixth session in a row. In Asian trade so far, Sterling has rallied to a high of 1.2763 versus the dollar, while versus the Euro, it has slipped to a low of 1.1798.

USD – Market Commentary

The slowdown in inflation may be temporary

ISM Services PMI slipped to a low of 48.8 last month, following a rise to 53.8 in May. Services output has supported economic output for the past few months, as both manufacturing output and consumer spending have suffered.

A less obvious part of the report is the employment index, which is generally overshadowed by several other reports. In June, the ISM employment Index slipped further into contraction, falling from 47.1 to 46.1.

The decrease in the composite index in June is a result of notably lower business activity, a contraction in new orders for the second time since May 2020 and a continued contraction in employment.

This may herald the slowdown in the economy that has been expected by the more bearish commentators recently.

The FOMC will take notice of falling activity and while this will not push them into an immediate rate cut which may be considered by the market to be a knee-jerk or panic measure, it may well encourage a more dovish outlook.

With the economy only growing by a mediocre 1.4% in the first quarter, the outlook for Q2 is unlikely to impress observers. Growth will only just beat the first quarter as the level of interest rates and the stubbornness of inflation depress investment.

After starting in April with a 3.9% estimate, the Atlanta Federal Reserve’s forecast tool predicts gross domestic product only grew at an annual 1.5% pace in the second quarter.

Raphael Bostic, the President of the Atlanta Federal Reserve, has turned marginally dovish in his comments about the economy and inflation. He sees inflation as coming under control, although there is still work to be done, and maintains that there will be a single rate cut this year, in the fourth quarter.

Following yesterday’s Independence Holiday, President Biden faces a tough few days trying to convince Senior Democrats that he is fit to stand in November’s election.

He has been encouraged to abandon his programme of “stage-managed” public appearances in favour of more casual “town hall” type meetings with supporters, allowing him to be more spontaneous.

In the past, closeness to his followers has been considered his “speciality”, but more recently he has been far more reserved, seemingly concerned about his mental acuity, which was painfully exposed during the recent debate with ex-President Trump.

The dollar slumped yesterday as data releases advanced the possibility of an early rate cut. The index fell to a low of 105.10 and closed at 105.14. It is now close to challenging support at 104.90.

EUR – Market Commentary

De Guindos is concerned that the new French Government won’t “stick to the rules”

Wages and activity in the service sector are both supporting the economy which is struggling as manufacturing and industrial output remain below the level between Expansion and contraction and holding up inflation which is still “stuck” at around 2.5%.

The composite index of manufacturing and Services PMI slumped to 50.9 in June as business growth slowed sharply. The market has been disappointed that the ECB, having cut interest rates once, sees little opportunity to follow through with one or two further cuts in the coming months.

Growth in the eurozone can be attributed fully to the service sector.

While the manufacturing sector weakened considerably in June, activity growth in the services sector continued to be nearly as robust as the month before. Services activity dipped to 52.8 last month, down from 53.2, but it still beat the market’s estimate of 52.6.

Observers are confident that the ECB will be able to cut rates in September, although if there is to be a further loosening of monetary policy it is unlikely to happen until December.

The minutes of the latest meeting of the ECB’s Governing Council showed that several members expressed concerns about the rate cut that was agreed upon at the meeting.

At her press conference, Christine Lagarde said that only one member of the Committee, later discovered to be Austrian Central Bank Governor, Robert Holzmann voted against the rate cut.

With wage growth continually surprising to the upside and claims being made for “inflation-busting” wage increases throughout the Union, there were several rumblings of discontent. It seems that in the end, it was a matter of credibility, as to defer the cut again would have sent the wrong message to the market.

U.S. monetary policy is also adding to the concerns of the Governing Council, but ECB official and German interest rate hawk Isabel Schnabel commented that she does not believe that by year-end, rates in the U.S. and Eurozone will be much different.

The Euro saw significant gains yesterday following the publication of soft economic data from the U.S.

It rallied to a high of 1.0813 and closed at 1.0811.

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.