“UK – Way forward after the Election…..”

UK – Way forward after the Election

After failing to win an outright majority in last week’s election Theresa May tries to unite the Conservative party before commencement of Brexit talks by reappointing most of her ministers, brought a Brexit campaigner and party rival Michael Gove into the government. May’s only hope to form a government is to win support from Northern Ireland’s Democratic Unionist Party which won 10 seats.  May’s aim is to seek confidence and make a deal whereby the DUP would support the Conservatives on key votes without joining a formal coalition.  On Tuesday May said that the talks with DUP were productive a view which is shared by DUP leader Arlene Foster.

UK Inflation and the Drop in Real Wages

The fall in the pound since the Brexit vote had an impact on consumer prices which increased by 2.9 percent compared with a year earlier and its biggest increase since June 2013 according to the Office for National Statistics.   The increase in inflation came from computer games and equipment which are imported together with increased cost of holidays abroad for British tourists.  Inflation has picked up around the world, however there is extra pressure from the fall in sterling which is contributing to a sharp slowdown in the UK’s economic growth since the beginning of the year.  The ONS said that excluding oil prices and other volatile components such as food, core consumer price inflation increased to 2.6 percent compared with economist’s expectations of 2.4 percent.  Furthermore, the ONS said that a measure of consumer prices which includes housing costs, the CPIH (a measure of inflation that includes owner occupiers’ housing costs) increased to 2.7 percent. The ONS also said that house prices in April rose 5.6 percent in annual terms compared with 4.5 percent in March, while those in London alone increased by 4.7 percent in April.  The squeeze on UK households increased in the three months through April as weaker wage growth resulted in the biggest loss of purchasing power in almost three years.  According to the Office for National Statistics average earnings increased 1.7 percent which is the slowest annual pace since early 2015. Taking inflation into account earnings fell 0.6 percent which is the largest drop since August 2014.

UK – Bank of England Policy

Monetary Policy Committee voted to keep the interest rates at a record low of 0.25 percent.

France

Emmanuel Macron gained majority in a first round of parliamentary elections which would help to push through business reforms. It was the lowest voting turnout in a French election with fewer than half of the 47 million voters turning out in the first round. First round results decided only four of the 577 seats on offer, whilst leaving the rest to be fought out on 18 June.  Macron who is the youngest leader since Napoleon has to make good on campaign promises in order for France to prosper by cleaning up politics and easing regulations.

US – Dodd Frank Act and Volcker Rule

A plan has been laid down to overhaul bank rules to ease many of the structures that were imposed on Wall Street after the financial crisis. The Treasury Department has outlined the changes in a report that urges the federal agencies to re-write some of the regulations to which there were complaints since the Dodd-Frank Act came into force.  Some of the changes: include adjusting the annual stress tests that assess whether lenders can endure economic downturns, and loosening some trading rules.  The purpose of the plan is to achieve sustained economic growth by increasing the efficiency of regulation and making it less burdensome.  Other unpopular regulations that the report asks to re-do is the Volcker Rule ban on bank’s proprietary trading.  The report covers areas as to how much of a capital cushion lenders should have or how to calculate the amount of leverage a bank takes on.

US – Retail Sales

Retail Sales in the US recorded their biggest drop in 16 months and consumer prices fell unexpectedly. According to the Commerce Department retail sales fell 0.3 percent in May amid declines in the purchases of motor vehicles and discretionary spending.  Consumer spending accounts for more than two-thirds of the US economy.  The economy grew at a 1.2 percent rate in the first quarter held back by a near stall in consumer spending and a slower pace of inventory investment.  According to the labour department the Consumer Price Index dipped 0.1 percent due to declining prices of gasoline, apparel, airline fares, communication and medical care services amongst others. It was the second drop in the CPI in three months. The dollar fell to a seven month low against a basket of currencies with the release of the data, and prices of US Treasuries rose while US stocks were trading slightly lower.

US – The Federal Reserve

On Wednesday the Federal Reserve raised the interest rates for the second time in three months and also revealed that it would start with balance sheet cuts by cutting its holdings of bonds and other securities this year. According to the Federal Reserve the economy continued to strengthen and job gains remained solid, while the unemployment rate has fallen to a 16 year low of 4.3 percent. The benchmark lending rate has been lifted by a 25 basis points to a target range of 1 percent to 1.25 percent.   With regards to the reduction of the $4.2 trillion portfolio of Treasury bonds and the mortgage backed securities which were purchased due to the 2007-2009 financial crisis and recession, the Fed gave its first clear outline.  The plan of normalizing the balance sheet will start this year and will focus on stopping reinvestments of larger amounts of maturing securities.  The overall size of the reduction was not mentioned.

China

Manufacturing in China is still solid while property is cooling. China’s economy has remained on solid footing in May and with nearly another six months to go Beijing is expected to meet its 6.5 percent economic growth target.  Funding costs are slowly rising and banks have been raising mortgage rates.

Market Roundup

On Monday technology stocks fell heavily across Europe and Asia, and Wall Street was expected to fall further after Apple’s stock had the worst day in more than a year. Lessened political tensions lifted the euro and European bonds.  The NASDAQ has so far outperformed the market by more than 15 percent.  On Tuesday European stocks rebounded from their seven-week lows as the shares in tech firms and financials have climbed.  After losing 3.6 percent on Monday the tech sector was the top gainer with a 1.1 percent increase.  After the Fed’s committee statement on Wednesday US stocks edged lower and prices of US Treasuries pared gains, while the price of gold fell.

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