The Month That Will Be (29th July 2024)
1. The Central Banks
On Wednesday the Bank of Japan will hike interest rates, the Fed will be unchanged but signal a cut is coming in September, on Thursday the Bank of England will leave rates dovishly unchanged and on Tuesday 6th August the RBA will hike if the Australia CPI data released Wednesday is even a smidge above expectations. In short, this is not quite the dovish pivot from the world’s central banks that had been expected as we head towards the final quarter of the year.
Inflation, employment and growth have all held up in the US, so even if there is a softer reading for the ISM Manufacturing on Thursday, Payrolls on Friday and Inflation on Wednesday 14th August, it won’t be soft enough to kick start a significant series of interest rate cuts for the next 18 months.
2. The Politicians
In any case, interest rates are fast becoming last year’s story. The world changes on 5th November. Whether it’s a Republican clean sweep or simply a tariff-trade-war-energised Presidency, inflation is likely to re-accelerate. Any clampdown on immigration will remove one of the key reasons for why America has been able to to grow without too much inflation in the past couple of years. Onshoring could fuel a Made In America boom. And any attempts to revolutionise (whether for good or ill) the institutions of government will increase the risk premium on American assets.
But the risk premium on non-US assets is rising too. France’s Macron has managed to use the excuse of the Olympics to defer any decision on a prime minister until mid-August. The Games end on Sunday 11th August, after which the real political games will begin. A country that has a political system designed to rule from the top down will attempt to build a coalition of the willing from the bottom up. The outlook is inauspicious. The Republicans have already said that they rule out a coalition even if they’re offering a ‘legislative pact’. Even if a constellation can be found, it will be prey to painfully slow policy making that is unable to take tough decisions.
Germany has already found this out to its cost. Although this year’s budget was finally agreed between the country’s first ever three-party coalition, it is only expected to increase growth by fractions of a percentage point. The BDI, Germany’s main business lobby group, said the measures announced wouldn’t “strengthen growth factors in a sustainable way“. The latest IMF Article IV consultation urged a loosening of the debt brake even though it’s “constitutionally binding”: “Noting that the debt brake has served Germany well, most Directors concurred that a moderate easing could create additional fiscal room without endangering debt sustainability“. The president of the Bundesbank (the Bundesbank!!) noted “widespread concern that investors were increasingly avoiding Germany” and recommended that “to create an employment and investment-friendly environment, it is important to keep an eye on the tax burden on labour and capital“. Yes, Buba wants tax cuts.
Germany’s budget still has to make its way through parliament in the autumn. It comes to something when 80 hours of talks between the three party leaders still don’t ensure there is not yet another row to come. A source close to the Foreign Minister, the Green Party’s Annalena Baerbock, admitted they only accepted the halving of the humanitarian aid budget because the alternative would be the collapse of the government and new elections.
3. Back to the Central Banks
In the face of increasing political risk, the major central banks have the chance to set out their stall at the annual Jackson Hole symposium which runs from Thursday 22nd August to Saturday 24th August. The title is “Reassessing the Effectiveness and Transmission of Monetary Policy” which could be rewritten as ‘there’s only so much we can do with interest rates and QE when debt burdens are so high, inflation is sticky and the general public are revolting’.
The Bank of England got away with their market-maker of last resort function in the wake of the Liz Truss Budget Gilt Debacle but it’s not a trick that any other central bank would want to have to pull. What would the ECB do if (when) it becomes clear that France can’t deal with their deteriorating debt-deficit dynamics? Should they intervene? Or only if by contagion to other countries? What would constitute a market dysfunction versus a rational market re-pricing of risk? How will the Fed cope if it has to deal with a more antagonistic Treasury Secretary refusing them the application of Section 13(3) powers that enabled the mass intervention and buying of almost any asset in the heat of the pandemic? How do any G7 central banks deal with China undertaking a geopolitical shift of its monetary reserves?
4. Meanwhile, in the Real World…
None of this will matter if the global growth engine can chug along. But the latest signs from earnings season have been relatively downbeat, with retailers having to employ discounting to keep sales going. Ryanair has had to cut airfares as profits fell by almost half, Burberry’s profit warning left the Chair confusingly suggesting they must move into luxury’s top tier but also introduce more products at more accessible prices, and Visa reported a rare quarterly revenue miss due to “a slight moderation in the lower-spend consumer segment”.
We will hear from behemoths Microsoft on Tuesday, Facebook on Wednesday, Apple and Amazon on Thursday and Walmart on Thursday 15th August.
5. Jobs
If companies are struggling, layoffs are likely to increase. We have largely ignored labour market statistics since the onset of the pandemic because it was clearly going to take time to find a new equilibrium. Matching people to the right job, with the right skills, at the right price in the right location was thrown up in the air following a permanent shift in how we live and work in our more virtual world. But the latest data suggest the US jobs market might just have found that new equilibrium, more than four years later:
The US labour market is the most flexible of the G7 so we can expect other countries to take time to reach the same point. But it does suggest that US jobs data going forward will finally offer more useful signals for the economy. Note that on Wednesday 21st August we will get a revision to the payrolls data from March 2023 to March 2024 which will enable the Fed to have a clearer picture of the employment outlook when they meet again in September.
6. The UK
There will be fresh jobs data from the UK on Tuesday 13th August, along with inflation on Wednesday 14th August, Q2 GDP on Thursday 15th August and Retail Sales on Friday 16th August. Almost all of it is irrelevant until we hear Rachel Reeves’ first Budget on the 30th October. It’s not where the UK has been which matters but where it is going. And given she has announced that the Treasury have spotted £22bn of overspend promised by the previous government, she’s going to have claw some of that back through tax rises.
But we won’t know the full details for three months, slightly throwing off any plans from her former employer, the BOE. This is why they will proceed with caution in the short term: after August’s meeting they only have one more meeting before the Budget is released. They can wait until November for the full monetary policy report – and the results of the US elections – to make any significant move on interest rates. At least the massive Labour majority will leave the UK looking relatively stable politically compared to other G7 nations.
7. The US
Whilst Europe heads to the beach, the US will still be working (even if from the Hamptons). The Kamala bounce will plateau and her party’s own internal critics lurk, ready to jump on any vulnerabilities. Rishi Sunak experienced the same problem having been crowned without a contest. It means that anyone other than core supporters do not feel invested in your success and your outright internal opponents feel cheated of their choice. It would therefore be worthwhile if there were some sort of contest at the Democratic National Convention which runs from Monday 19th August to Friday 23rd August. It could come through her choice of Vice-President, as both the Presidential and VP choices are technically separately chosen by DNC delegates.
The speed with which the party closed ranks behind her candidacy does at least demonstrate that the Democrats know they’re in a tight spot. It wasn’t just the Presidency at threat but also down the ballot choices for Congress, governors and beyond. Kamala can at least rally the base. As one Democrat put it to us in the wake of her nomination: “at least now I have hope”.
Hope doesn’t mean a win, however. The media love a new story – remember “I agree with Nick” in the UK? But Cleggmania didn’t translate into more seats for the Liberal Democrats in 2010. The US election will, as always, come down to a handful of voters in Nevada, Michigan, Georgia and Pennsylvania.
8. Holidays
With that, we bid you a happy holiday full of sunshine and cocktails. The BlondeMoney Team will still be available and ready to pounce when events require.
