America First – The Sequel

Donald Trump is polling 11 points ahead of an increasingly frail-looking, 81-year-old  President Joe Biden.

By the time of the November election, Donald Trump will be 78, and assuming Biden feels compelled to stand for re-election, it will be the first presidential election where both candidates will be older than the average US life expectancy. Eight former presidents have died in office, and one wonders if, sadly, there might be a ninth? This could make the role of Vice-President an even more important decision. Unfortunately for the Democrats, Vice President Kamala Harris even trails Joe Biden in current public opinion polls.

Meanwhile, in a foretaste of what may be in store from ‘America First – The Sequel’, Trump has already warned of more tariffs on China and withdrawing support for those NATO members who do not spend enough. His comment has already led German Chancellor Olaf Scholz to say that Germany will ramp up its military spending and meet its commitment to spend 2% of GDP on NATO defence.  Pretty ominous – Trump is not even in power, yet his threats appear to be driving change!

Speaking of ramping up spending, Kwasi Kwarteng recently announced that he will be standing down as an MP at the next general election. His announcement comes as Labour Leader Sir Kier Starmer is under fire from environmentalists for dropping his commitment to spend £28bn a year on green projects. Could it be that the Labour Government in waiting has learned a valuable lesson from ‘Kamikwasi’ Kwarteng/Liz Truss and their disastrous mini-budget?

With Labour still well ahead in the polls, likely to gain seats from the SNP in Scotland and the Conservatives likely to lose voters to the Reform Party, no wonder shadow ministers have been working on plans for power. Shadow Chancellor Rachel Reeves has already flagged a ‘fiscal lock’ which would ensure that chancellors cannot ignore or bypass the independent Office for Budget Responsibility (OBR). This is to persuade voters that their government really does intend to spend their money wisely, but more importantly, to signal to markets that Labour has learned from Kwarteng/Truss. Labour is likely to impose VAT on private school fees, ensure foreign residents are subject to full UK taxation and may impose a windfall tax on certain sectors, such as energy. However, it was inevitable that the £28bn green investment plan was going to have to be amended given all the other demands from education, healthcare, and social care, while re-building the UK’s defence capability.

Whichever party wins the next election, they will face the same geopolitical and economic challenges and the simple fact that there is not enough money in the pot for everything.

What have we been watching

A quieter week in the UK given it was school half-term holiday. An important week though for the government with both economic growth and inflation data. The inflation data was released on Valentine’s Day, but were investors feeling the love? While not swept off their feet, investors liked the UK inflation numbers with a narrow downside surprise in January. However, it was a different story in the US, where hotter than expected inflation dented hopes of an early interest rate cut. However, in both the UK and US, investors appear to have scaled back the expected number of interest rate cuts following the latest inflation data. 

The situation in the Middle East continues to look grim. Egypt is now threatening to suspend the Egyptian-Israeli peace deal signed in 1978 as Israel continues to plan to send ground forces into the city of Rafah in Gaza. The agreement has been a pillar of stability in a turbulent region. It looks as if companies and consumers will have to live with extended supply chains around the tip of Africa for the foreseeable future. This looks manageable for European manufacturers – Tesla has re-commenced production at its German EV plant – but could drive prices higher. Meanwhile, UK shoppers have been warned of a temporary shortage of black tea due to Houthi attacks on shipping. What? No cuppa in a crisis?

The US Congress has yet to approve the long-awaited $95bn aid package for Ukraine, Israel, and Taiwan after months of political wrangling. Russia looks to be exploiting the delay and has launched a major offensive along much of the Ukrainian frontline as Ukrainian forces run short of ammunition. As noted above, Germany is stepping up defence spending but the head of Germany’s largest defence contractor, Rheinmetall, believes Europe will need ten years before it is fully ready to defend itself.

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In the UK, the ONS released its fuller set of employment data, although questions remain about its accuracy. Nonetheless, the latest figures did little to dispel the impression that the UK job market is still very tight. However, private-sector regular pay, the Bank of England’s preferred measure of wage growth, did slow slightly year-on-year to 6.2%. The market had been expecting a modest uptick in inflation in January, but CPI was steady at 4%. While wage pressures remain and there could be price increase from the shipping supply chain issues in the Gulf, the mild weather across Europe has seen gas prices continue to fall, and year-to-date are down by over 20% and back to Autumn 2021 levels. Meanwhile, the UK economy contracted by 0.3% in the final quarter of 2023 making a slight technical recession. Given the industrial action at the time and retail sales pulled forward into November from December markets had already factored this in. Markets tend to look forwards, so did take comfort from a rebound in retail sales in January with food retailers doing especially well. In addition, investors are focused on the timing of the Bank of England’s first interest rate cut. Surely it could not come ahead of the US Federal Reserve’s cut, could it?

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European Central Bank President Christine Lagarde speaking to the European parliament continued to resist calls for early interest rate cuts. ‘We do not want to run the risk that cuts would be reversed, which would be a waste of everything that we’ve done and would lead us having yet more measures.’

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US inflation eased in January to 3.1% from 3.4% in December but was higher than had been expected. Annualised core inflation, excluding food and energy, was steady at 3.9% but had been expected to drop slightly. The data would appear to dash any hopes of an early interest rate cut by the Federal Reserve and US investors are now increasingly looking at the first cut in May/June and forecasts of the number of cuts has also been scaled back slightly.

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Japan’s economy contracted by 0.1% in the final quarter of 2023, following a 0.8% decline in the third quarter making a slight technical recession. It was overtaken by Germany as the world’s third largest economy, although both manufacturing-heavy exporting countries have suffered from China’s economic woes.

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Brent oil edged up to $82 as events in the Middle East continue to escalate.

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Finally, yet another casualty of inflation? More than 900 schools in England were built through PFI contracts, with the first opening in 1999. PFI was launched by Conservative PM John Major in 1992 but expanded considerably under Tony Blair’s Labour government. The PFI schools were tied into 25-year inflation linked maintenance contracts using the higher Retail Price Index. No wonder many head teachers are now complaining about spiralling maintenance costs. The Department for Education said it is increasing support for schools in PFI contracts by 10.4% in the current financial year.

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.