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Our views 08 July 2024

JP’s Journal: Changing the rules

5 min read

The UK General Election went mostly to script but there were important takeaways. First, Labour won a huge majority but with a surprisingly low share of the popular vote. Second, the right-of-centre parties will start to realign, given the rout of the Conservative Party. Third, the two-party system is over. Voters will see that other parties can do well despite the electoral system.

Labour did the best, but the Liberal Democrats, Reform and the Greens are not going away. Behind all of this is the end of traditional party allegiances – a trend seen in many western societies. The outlook is for a period of political stability courtesy of Labour’s large parliamentary majority, but with an underlying  political landscape that is choppy and uncertain.

It is likely that the outgoing Prime Minster is regretting his decision to call a July election – after all he could have waited until January 2025 – as the next few months should start to see positive economic developments. Inflation is likely to fall below 2%, growth trends are being revised up and interest rates will come down. Just as importantly, a later election would have pushed the Liz Truss failed experiment further back in peoples’ memories and possible seen Nigel Farage distracted by the US Presidential election. The timing will go down in history as a strange choice.

Election impacts on markets

From a market perspective the UK election outcome is a non-event. The 10-year gilt yield ended at just above 4.1%, a fall of 3bps on the week. This is the same level as on the day the election was called. Indeed, market moves were more influenced by events in the US, where data pointed to a loss in economic momentum. Following a weak set of ISM (a purchasing managers index) readings, particularly services, the US labour data last Friday provided more evidence of a slowdown. Whilst the headline non-farm payroll was stronger than expected at 206,000, there was a big downward to the past two months. Again, employment gains reflected job creation by government, in contrast to the private sector where the data was below expectations. Overall, these trends are supportive of the Federal Reserve cutting rates, with the unemployment rate nudging higher to 4.1% and average hourly earnings growing at a modest rate. Against this background, 10-year US Treasury yields ended at 4.3%, 10bps down on the week. Investors are now pricing a high chance of a cut in September, with a possibility of two further reductions by early 2025.

Internationally, the UK has been overshadowed by the surge in support for both populist and hard left parties in France’s parliamentary election. The actual outcome was a surprise, with the left wing emerging as the single largest bloc and President Macron’s party doing better than expected. There is no obvious coalition which implies a hamstrung parliament. At one level the election gamble has worked for President Macron, demonstrating the strength of the anti-populist vote. Conversely, if things do not work out well, National Rally may be the main beneficiary at the next Presidential election. From a market perspective French bonds weakened on the news but the yield premium to German bonds, at around 70bps, is still 10bps lower that the level reached in the immediate aftermath of the election call.

Back to the UK and thoughts on the fiscal constraints facing the new government, given that it intends to stick to the current fiscal rules and has ruled out tax increases in many areas. This will be a massive challenge. The change Labour is proposing relies on supply side reforms to lift trend growth; but even if successful, this is no quick fix. In the meantime, those fiscal rules will bite. The Institute for Fiscal Studies (IFS) estimates that the Labour’s manifesto implies further cuts to unprotected departmental current spending and capital investment; in my view, this does not sound realistic. So why not change the rules? The easy answer is that it may spook markets, a rerun of October 2022. The government will want to avoid this, for political and economic reasons. But an approach that emphasises public investment may allow for a bit more borrowing without upsetting investors. This is the most likely course of action but tax increases will also play a part. Keeping both markets and electors happy will require remarkable skills – and some luck.


This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.