08/07/2024

Politics remains in the spotlight: Last week's UK general election, the French runoff election, growing pressure on President Biden to reconsider his candidacy for the November election, and the upcoming Third Plenum in China in two weeks will keep markets focused on political developments.

In the United Kingdom, the general election unfolded largely as anticipated: Labour secured a comfortable majority with 412 seats, while the Conservatives managed to win only 121. In the coming days, Labour will outline its policy agenda in greater detail, starting with the King's Speech that inaugurates the new parliament on July 17. Over the summer, a number of policy announcements are likely to be made as a prelude to the autumn budget, which will be presented between October and November. The government is expected to be orthodox and unlikely to surprise the markets.

In contrast, the second round of the French elections resulted in an unexpected victory for the left-wing coalition, while Le Pen's feared party came in third. However, markets are not finding much cause for optimism as France faces a period of political instability. Currently, a center-left government seems most likely, but given the lack of common ground with Macron's centrists, governing would be challenging. A technocratic government is also a possibility, which may reduce fiscal risks but will not eliminate them entirely. In the end, the resulting government will not be able to implement policies aimed at stimulating growth or improving the state of France's public finances, although it would also prevent the implementation of policies that could potentially endanger the country's financial stability.

Finally, from a global perspective, the most significant political issue is the U.S. presidential election in November, and the uncertainty surrounding Biden's candidacy remains high. In recent days, contradictory reports have emerged: on one hand, the New York Times reported that the president was seriously considering dropping out of the race, while a White House official denied this possibility. Meanwhile, bookmakers estimate a 70% probability that Biden will ultimately withdraw. The Democratic National Convention is scheduled to take place from August 19-22.

However, while politics is dominating the news, it is the macroeconomic data that can have the most influence on central banks, particularly those related to the labor market. On this front, the June US employment report indicated a slight slowdown in the labor market. Although a total of 206,000 jobs were added, slightly exceeding the consensus forecast, hiring for the previous two months was revised down by 111,000 jobs. This leaves the average growth over the past three months at 177,000 paychecks. Additionally, the unemployment rate rose to 4.1%, one-tenth of a percentage point higher than expected. Wage growth, meanwhile, continued at a solid rate of 0.3% month-on-month and 3.9% year-on-year.

In contrast to the United States, where the unemployment rate has risen by 0.7 percentage points from its lows, in the eurozone it has remained stable at the historic low of 6.4%. Although unemployment has increased in some countries within the area, European labor markets have so far demonstrated greater resilience than those in the United States. This is partly because the European labor market has never been as tight as the U.S. market, and given that economic growth is expected to be higher in 2024 than in 2023, the unemployment rate in the eurozone is likely to remain low.

In addition to the labor markets, U.S. leading indicators showed signs of weakness in June. Both the services and manufacturing indicators fell into contraction territory, suggesting a loss of momentum in the U.S. economy.

In Europe, the preliminary CPI for June fell by 0.1 percentage points to 2.5% year-on-year, in line with consensus forecasts, while core inflation was slightly above expectations and remained stable at 2.9% year-on-year. Last week's activity data indicated further signs of slowing growth in the eurozone. May's industrial data from Germany disappointed the market, showing weakness in factory orders and industrial production. Similarly, Eurozone retail sales in May recorded a lackluster monthly growth of 0.1%. Overall, the data suggests that eurozone GDP growth will slow in the second quarter, compared to the solid 0.3% recorded in the first quarter of 2024.