Macroeconomics: The Day Ahead for 04 July

With the US closed for Independence Day, as the UK holds its general election, it will be a rather quiet day in terms of data and events. Aside from digesting German Factory Orders and Swiss CPI, the only other data item of note will be the UK Construction PMI. The events schedule has the ECB June policy meeting minutes and the BoE’s Bank Liabilities & Credit Conditions Surveys, with ECB’s Lane and Cipollone the only central bank speakers. Spain and France hold multi-maturity auctions, the latter perhaps likely to see sluggish demand given election event risk.

** Germany – May Factory Orders **

– Orders again undershot forecasts at -1.6% m/m, meaning that they have fallen in every month this year, and echoes the sustained deep contraction signalled by the Manufacturing PMI and the Ifo Business Climate. While the category breakdown saw increases in both Intermediate Goods (1.4% m/m) and a fifth consecutive rise in Consumer Goods (4.9% m/m), it is the persistent weakness in Capital Goods (-4.3% m/m), which underlines the woeful overall state of German industry. The shift higher in energy costs and inflation’s impact on wages have certainly contributed a lot to the current malaise, but a good deal of the blame also has to be laid at the door of the US IRA and CHIPS acts and China’s drive to ramp up domestic production capacity, in effect squeezing out German industry.

** U.K. – General Election **

– Anything other than a very large Labour majority would be a major surprise, so the question is whether all the ‘good news’ is priced in, above all in FX terms. The performance of the GBP, Gilts and FTSE indices imply that much of the Brexit and unstable politics risk premium that persisted for many years has been priced out, and there has been some added flight to safety benefits from the French election turmoil. There should in theory be some benefits going forward from both domestic and foreign investment inflows, as there remains a discount in UK asset prices, which given the hefty premium in US asset prices (above all tech) and the more justified concerns about the Eurozone should support in the initial phase of the new Labour government. But the UK’s fiscal position remains very adverse, and Labour’s stated intention to raise capital gains taxes will be a matter of considerable concern, as will the termination of the Non-domiciled tax status. As ever manifesto pledges are nothing but hot air, and investors (at home and abroad) and the BoE will be monitoring the initial outlines of Labour’s fiscal plans very closely. Given that Labour’s energy transition plans include a drop in the ocean allocation of £8.8 Bln to set up GB Energy to stimulate ‘green energy’ investment, it has to be observed that it will have to offer some very large carrots, including exemptions from capital gains tax for this to have any success. If additional financing is to also be raised via ‘windfall taxes’ on hydrocarbon sector companies, this will run the risk that this will lead to premature closure of existing output, which would endanger the UK’s already fragile energy security. Indeed one might recall that the Blair Brown governments’ PFI (Private Finance Initiative) projects were hardly a great success, indeed a great many failed to achieve many of their intended goals and are still being paid for, and this has not been forgotten. It should also be borne in mind that if Labour do obtain a large majority, then those that remain on the left wing of the party may choose to be rather more vocal in their resistance to some legislative initiatives, re-awakening concerns about political instability. In the same vein, it should be remembered that unlike 1997, that voters are not voting for Labour, but against the sleaze and incompetence of successive Conservative governments, the honeymoon for Starmer & Co will thus be very short-lived.