NAB Morning Call

Election Fever

Friday 5th July 2024

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There are three big political stories today. First, the French election round two could still deliver a majority for Marine LePen’s party. But NAB’s Gavin Friend says markets are not viewing that as such an alarming outcome, saying there’s been a bit of a learning curve about what this new party could do. The UK is likely to face a change of government today, which could bring new optimism to a country that is clearly ready for a change. And, as Gavin observes, the challenge to Biden’s Democrat leadership hasn’t gone away yet. Data wise, today’s key number is the US non-farm payrolls. The numbers to watch are the employment rate and average hourly wages.

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Duration:: 19m
Broadcast on:: 04 Jul 2024
Audio Format:: mp3

The US has been celebrating Independence Day, the UK might be celebrating a changing government, well it sort of depends on your perspective I guess, and France gets ready to go for round two of their polls this weekend, so what are the market implications for all of that? The big number today of course is non-farm payrolls, so we can't avoid talking about that, it's Friday, it's the 5th of July 2024, it's the morning call from now, good morning. Well a quarter percent fall in the US dollar with a quarter percent rise in the euro, the Aussie is up a third of 1% to 67.3 US cents, and 0.1% rise in the pound, bond markets closed in the US, but yields are higher in Europe, up three basis points for the UK, 10-year guilds, up three in France as well, up two for much of the rest of Europe, Aussie 10-year yields down just one basis point yesterday, to 4.41% on futures now though, guess what, back up 1%, so not big moves really anywhere in bond markets, US equity markets closed, of course it's still being the 4th of July over there, shares were higher in Europe, so 0.9% higher for the FTSE 100 and 0.4% for the DAX and the euro stocks 50, at close and oil is higher, WTI is up 0.4%, Brent up just 0.1% to a little over 87.40 a barrel, so quiet with the US on holiday, but busy for Europe, the UK has voted, we are just a little bit too early on this podcast to bring you the results, but it looks like a wipeout for the Conservative Party, if you believe the opinion polls, and a change in government to Labour, but the weekend of course is the French election as well, so let's look at all of that first off with Nab's Gavin Friend in London, so are markets reacting I think perhaps more to the French election rather than to the UK one, I mean the UK one, you know it may be a big change politically for the UK, but does it really change the finance markets too much, we're going from one government promising to be physically conservative to another one. Yeah, let's just wind back a bit, I think markets on Thursday are using the 4th of July, the US public holiday to just pause for breath, you know in the bigger picture, there's an awful lot going on, you mentioned the UK election, we'll talk about that, Sundays, the second final round of the French election obviously is very important, we've got the Biden story and his candidacy which won't go away despite you know the White House circling the wagons and note there that the ABC George Stephanopoulos TV interview has been moved up to Friday, later today and then of course you know on the big economic stage we've got US payrolls for June later on today, next week on Thursday CPI for June, crucially important that remains that the benign reading that we've seen in the last two prints and then also next week of course Fed Chair Jerome Powell does his two congressional testimonies, so this is one of his two you know the annual set pieces where he can deliver a narrative, so there's an awful lot really for markets to think about and I don't blame them for sort of you know not doing an awful lot today, that has been a bit of movement, that hasn't been so interestingly you know even though we've got this French election coming up and you think there'd be a bit of uncertainty, we had a bond sale on Thursday in France that sort of went okay, it's in that spread between German and French yields narrowing a bit more as though the risk is diminishing, so I mean there is that hope isn't there that you know the Pence party is not going to get that majority, but we never know, well yeah I mean of course the markets, the markets big worry would have been if we got a left-wing alliance government coming in because they're the guys that have the much bigger spending and taxation policies and don't fear a least trust moment, they don't care right, it's not really on their agenda and that's been, that's now not going to happen and to your point we have seen in somewhat of a pushback to people's you know view that one of the reasons for Macron's call the election was to you know show the far right in a bad light and actually you know people thinking that strategy was broken, what have we seen in the last few days, we've seen the left-wing alliance and the centrists coming together and shutting down 200 of the constituencies where you know they would have been a three-way tussle, so they've combined so that they've been now ensured a much closer two-way battle between either one of those parties and the far right national rally, so but I think to that point you know because markets now read into that the likelihood as our base case was that that comes true in terms of a hung parliament, you've seen that 10-year French-German spread come in it was 48 basis points, it blew out to 83, it's backed down into the mid 60s and that seems now the most likely outcome from this election, you can't rule out that the French people don't like being told what to do and they go out and vote RN in, that's still possible, but I think either of those two out turns, the hung parliament or RN getting in, markets will take those in their stride, obviously the hung parliament is the most benign outcome because you're going to have, first of all, a problem for Macron to try and get a coalition together, it's not going to be easy, for one reason is that Jean-Mélochon, the far left leader, wants to be the prime minister and actually he's not involved in this at the moment in terms of this coming together of the left and the centre, Macron has made it clear we're not doing deals with the far left, so it could be quite difficult for him to get something together but I hear news today that Jean-Méloch, the president, the 28-year-old president of National Rally, has now changed his view to say that RN would be prepared to become, he'd take the prime minister role, even if RN did not get a majority, so there's some shuffling around going there and I think for markets, you know, a fairly benign outcome, obviously if RN do get in with a majority, a little bit more unsettling because we need to see what their policies are, they've watered down some of those, they seem to be very open to being flexible, trying to get some budgetary moves back in. The market response was so great, wasn't it, when it looked like there was a danger that they would become a majority, the market response was quite overwhelming, so to say, well, they might get in now and the markets will be happy with that, seems a bit strange. Don't forget there's a learning process, people need to, this was a shock, people need to get their heads round, investors need to understand, what am I looking at here, you know, what are the issues, and Jean-Méloch and Marina Penn, you know, they spent, she has spent over 10 years trying to detoxify the party, making it more electable, the idea that they're going to come in and fit a peak and blow it all, I mean, they could do, but I just, you know, does that sound credible, it doesn't sound credible, so the market's applying that for the moment. The big test, of course, as we go forward is, you know, you're probably going to get in a hung parliament, you know, gridlock, policy gridlock, and then by you've got the ratings agencies, the IMF, wondering about what you're doing about your debt and your deficits, that needn't blow out too far, but it doesn't improve, right, so the market's going to maintain a watching vigil on French public finances, and then this might only be a staging post for a year before we do it all again, and of course, we've got the budget they're trying to get together in September, October, but that's not going to be easy, so, you know, I think that we can see a reasonably, a slight increase in the positive reaction to what we've seen so far on Monday morning in APAC markets when they open up to this, but probably not much more, I mean, 60 basis points, 10-year French Germany's probably about it, the Euro may go up to 109 non-farm payroll, notwithstanding, you know, markets can think about other things for a while, but it's going to be there for some time to count that issue in front. So, right, and then data-wise, you know, we've been seeing quite a bit of weakness in Europe lately, we got that with the construction PMIs, lower for Europe, lower for France, up a bit for Germany, but for very low levels in Germany, 38.5 to 39.7, all well below 50, whereas in the UK, actually, the construction PMIs are at 52.2, so Britain is building Europe less so, so we've still got that, you know, more signs of that slowdown, we had the ECB minutes out last night, so was there anything of a note in there? There were a few things, I mean, remember this is the minutes from the 5th or 6th June where the ECB did actually cut rates, but they were very clear then that they didn't want to give forward guidance about what happens from this point. We've seen from, you know, the commentary from various governing council members, since that point, some are looking for a few rate cuts, some are looking for maybe one or two, you know, there's a whole range of possibilities there. The minutes we're talking about, actually, some doubts were there, were raised on some members on about whether the recovery would be as strong as expected or take place as they thought possible higher savings rate, which might actually, you know, derail some of the consumption, that kind of stuff. The big focus, obviously, on wages and wage growth and the fact that the go-seated wages and employee costs were still high in Q1, but then expectation from the economy so that they'll come down. So there's a no real certainty there. We're maintaining our view that the ECB can cut twice in September, that September and December, but a lot of that will depend on the Fed, of course, and, you know, it'll depend on the trajectory of inflation, which in Europe does now that disinflation process looks over the next few months that start to come down two and a half percent towards two percent towards the end of the year. So in retail sales for Europe today, as well, which we assume are going to be soft because all the other days has been soft coming out of Europe lately. So just very quickly, before we finish on politics, the UK election, I made the point earlier. I mean, we've known for a long time that there was going to be a change in government. It seems very, very likely, but, you know, from one physically conservative government to another government saying, well, we're going to be physically conservative as well. Maybe that's where the markets aren't too faced. Yeah. I think that, you know, obviously the markets are going to be interested in the announcement effect in terms of how, you know, labor have been ahead, the opposition party have been ahead by 20 percentage points or so for months and months and months, you know, that suggests a big majority. Markets will need to see that. They'll need to see the, you know, the announcement that they've won, how big is the majority? Because that then plays into how much resistance and pushback is there to their legislative agenda, which is going to be big. There's a lot of focus on where the Tories come, the conservative government, the outgoing conservative government. Do they actually not even make it into second place and therefore are not Her Majesty's official opposition? I suspect. Would not be a thing. But I think, you know, if you look at, you know, the Chai Tori voters, people getting, there's a huge, there's a huge contingent of undecided voters out there. And I guess that that's going to play to when you get to the polling booth. You know, do you finally just said to say, well, I'm going to, you know, I don't want more tax rises. Tax rises are coming for both, but you know, whoever gets in, but at least the Tories are saying our plan is to lower taxes over time. Anyway, the markets will then move forward to, well, what is Labour going to do? The big thing for them, the tax take is high. Like Australia, we have this bracket creep that's been going on for years, it's going to go on for years more. They can't pull that lever. And if they do, they'll kiss goodbye to two terms in office, which is their plan. They're going to try and pull all the growth on the various growth levers that they can. So you've got to think about things like house building, infrastructure investments. They don't have a lot of money, but they're hoping to get the confidence back in in various areas to try and then, you know, introduce them or encourage private investment. And the thing that's been missing is business investment, right? So think about house building infrastructure. Think about clean energy. They've got this big clean energy plan, retrofitting houses for their insulation. They want to try and get clean energy by 2030. They're going to create 650,000 jobs by then. Think about things like green steel, ports, financial services, the pension reform, these kinds of things, defence, life sciences, things that the UK has been good at, but it kind of, it's kind of lost its way a little bit. Things that they think are easy touch points to restart and re give a boost to with some much needed confidence. But at this stage, it's all promises, isn't it? So I guess everyone's going to hold off and say, well, all that sounds good, but, you know, we've got to have the confidence you can actually deliver. Yeah, but this is why they created things like great British energy. They want to do this thing with the National Wealth Fund. They think that they've got the plan, they've been talking to business long enough to actually get that, give that confidence. And that they, unlike the Tory party, I've been talking about, that was very divided. These guys do seem to be on a mission to try and provide that much needed confidence. So we'll see where it goes. I mean, there's, it thinks like house burning, not be easy, not least because of things like skill shortages on certain things, you know, there's lots of holes in this. But they are... I don't know my backyard rule as well, which, you know, is not just an Australian phenomenon. So anyway, yeah, a lot to look out. And I just mentioned that the tacking close to Europe, Europe is very wary, but Europe has a war on its eastern flank. So if the UK were to come up with some kind of big defense and security pack for Europe to say, we can help you, we can help you with the immigration as well. These are the things that we can do rather than tinkering around with other bits and pieces. And hopefully from that, you know, we'll improve the trade links. Right. It's about hope and optimism. Right. Gavin Friend for Prime Minister, bringing it on. I've never felt so enthusiastic about politics in my life. Look today, well, composite and services PMIs for Canada. They were out this morning, they were a bit lower, services has gone from 51.1 to 47.1. So that is quite a big drop in the Canadian services sector, Canadian employment numbers are out tonight as well, Australia's trade data yesterday, not much changed there and narrowed a little to $5.8 billion in May exports are up. But of chunk of that, can we put down to iron ore prices? We get some Japanese numbers today, including household spending and the coincidence index, which measures the health of the economy. It has been increasing, which means the economy is expanding, but it's been doing that for a few months since February, but only because it fell so much at the beginning of the year. So it's been playing a bit of catch up. We've had the topics index for Japan hit a record high yesterday, while the yen was at its lowest level since 1986. So what happens next is the question for Japan, isn't it? Then the next big one, obviously, is tonight the employment numbers for the United States. Late Aussie time, non-farm payrolls, maybe the unemployment rate will stick where it is, but it will be the number we want to see is average hourly earnings coming down. They're growing at 4.1% year-on-year at the moment, aren't they? That's exactly right, Phil. 4.1% expected to come in at 0.3 on a month for a 3.9%, so drop back down below 4% again. That would be a move in the right direction. Obviously, the headline job creation number is key, 190,000 down from that and WAPA 272. Markets will be looking for also any downward revisions to that 272. That tended to be the case when we had those big numbers earlier on in the year. I suspect the market is going into this with a view that if it's another upside surprise, to the extent that the core inflation numbers we've seen, and as I said, we've got another one next week, they've been benign, we had a 0.3, we had a 0.2, we had another 0.3 or 0.2, then that will continue, and that payrolls needn't derail the idea that the Fed hand-cut race as early as September. To that point, I think it's pretty sensitive, haven't they? If there's anything upside surprise, we are going to see a response to that. Yeah, I think that's right. I think that's right, but the market still has time. The narrative has shifted a little bit because we've had a number of weaker numbers coming out earlier this week. Obviously, the services and the manufacturing certainly, the services PMI, the caution of course, is that that's been extremely volatile going from below 50 to almost a bit in 50s and back down again. But there have been other areas of softness in terms of retail, in factorial and asturable goods. The market's view is that these can continue, we can keep the shell on their own in terms of a September cut, even though it's not fully priced by the markets. It's the sort of economist view that that's certainly up for grabs. And of course, the unemployment rate, the market is very sensitive to this, not least because we've seen other labor market numbers slow enough. I know the jolt's numbers this week were a little bit higher, but the trend there has been down and weekly average earnings have been ticking up. One of the issues that the market seems beginning more sensitive to is if this labor market is turning, when it does turn, it tends to move quite quickly. And so it will be very, it will be a flipper sensitive to a tick up to 4.1 or something in the unemployment rate. Does it turn today? That is the question you've got me very excited now, Gavin. We'll leave it there for now. And we'll talk to you again very soon. Thanks. Yes, Phil. Good to be here. And me being Friday, of course, the weekend edition is out later today. Eleanor Cray, senior economist at PropTrack joins me to discuss why, when interest rates are so high in Australia, why do house prices keep on rising? I guess a confluence of factors or a perfect storm, so to speak, whereby we know we've had upgrade activity incentivized by home equity gains. We've had very strong population growth, rental market, tightness, incentivizing those, of course, with the means to purchase sooner than they otherwise would have been also encouraging it. Bester activity, all of those factors have added to home bike demand. At the same time, we've still got that pandemic overhang of smaller household sizes adding to housing demand as well. Whilst supply has remained tight and that supply with respect to stock on market, but also the delivery of new homes, the construction industry challenges have really slowed the delivery of new homes. So all of those things. But when interest rates start to fall, will that mean prices will rise even higher? Or is it all factored in? Interesting discussion with Eleanor this afternoon. Listen at your leisure over the weekend. You can get it wherever you normally get the morning call from. And after that, I'm back on Monday for the next edition of the morning call as well. I'm Phil Thanks for listening. [MUSIC PLAYING]