JP’s Journal: Becoming grumpy

Am I turning into Victor Meldrew? Last week I found myself telling people how to queue properly for a taxi and I was surprised how direct I was. My wife, who was with me, made the observation (unhelpfully) that I was starting to resemble the grumpy character from the TV series 'One Foot in the Grave'. Perhaps it comes with age, as some inhibitions fall away and the inner character appears.

In the spirit of straight talking, during last week’s D-Day commemoration the Prime Minister scored an own goal. He gave the impression of prioritising domestic politics over recognising the international dimension of D-Day, despite a war raging in Europe. He also lost the opportunity to be seen with global leaders. Is it important? In my view, it will not impact who forms the next government but at the margin, it increases the chances of a large majority for the Labour Party. More importantly – and here I disagree with the view that this is a boring election – the nature of the potential future opposition will be forged in the coming weeks. The outcome will determine whether the Conservatives morph more towards being a populist party, appealing to more socially conservative voters, or reaffirm a liberal orientation. The choice will have an important bearing on the nature of UK politics over the next few years.

Back to markets and the interest rate rollercoaster continued. Sentiment in the early part of the week favoured some acceleration in cuts, reflecting weakness in US data. By Thursday attention was focused less on whether the European Central Bank (ECB) would cut but what the messaging would be. As it turned out it was a relatively hawkish 25bps cut with emphasis on fighting inflation. There was reference to domestic price pressures remaining strong due to high wage growth and acknowledgement that inflation is likely to remain above target well into next year. Overall, it looks like the ECB is in no rush to reduce again.

US employment data came out the next day and contradicted the slowdown narrative with non-farm payrolls exceeding expectations at 272,000 versus the consensus of 180,000. Average hourly earnings also increased although the unemployment rate rose slightly to 4.0%. The largest job increases were in healthcare and government, following a recent trend. However, the household survey data told a different story: it showed that the number of people employed on the household survey dropped. Overall, these numbers do not change the dial on Federal Reserve's thinking. Domestic inflation is still a little too high while the labour market is showing some signs of easing up.

Despite the Friday sell-off, government bond markets were generally up on the week. US 10-year treasury yields closed at 4.4% whilst the benchmark gilt ended just above 4.25%. Credit bond spreads showed weakness with sterling non-gilt indices widening 3bps, although still below 1%. High yield markets were mixed but sentiment appeared weaker.

The results from the European Parliament elections, released on Sunday, confirmed expectations that incumbent parties are under pressure. The initial reaction was modest weakness in the euro and upward pressure on bond yields. Somewhat surprisingly, the French President has called for a legislative election which will occur either side of the UK poll. What it shows is that politics in western democracies is fracturing and old assumptions of allegiances can no longer be relied upon. Time to throw away my old politics textbooks.

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