FTSE Flat on the Day – Market Wrestles with Rate Expectations and Labour Manifesto

The market heard cautious remarks yesterday from Fed Chair Powell, hoping that data will prove a cut is warranted.

Investors and traders are hoping tomorrow’s inflation data from the U.S. will show a reduction in the inflation. After comments from the Fed Chairman again reiterating that more data is necessary showing a reduction in inflation to cut rates.

Analysts are expecting a decline in inflation YoY from 3.3% to 3.1%, which would add to the perception that the Fed is getting closer to acting on monetary easing. Fed action would make it easier for the BoE to take action.

The pound is struggling to regain ground above 1.2800, a weak currency can lead to imported inflation. In a fight to keep inflation low, the BoE would be weary to cut rates before its U.S. peers.

Labour Party Manifesto

The possibility of lower rates that has been driving stock markets recently is confronted by the pledges made by the newly elected Labour party government. The Labour party pledged £1.3 billion in public health spending.

They have also promised various infrastructure spending and spending on a variety of youth and equity programs. In contrast to their spending, they have also promised not to raise income tax, sales tax, or national security.

At the same time, they are committed to capping corporate tax at 25%. This only leaves one route to fund government, more debt.

Higher issuance of gilts will inevitably lead to higher yields. The consequences for the stock market wouldn’t be so rosy.

Higher yields can be shaken off by an expanding economy. Tomorrow we are expecting GDP data for the UK.  Forecasts are for a slight improvement in GDP YoY from 0.6% at the last reading to 1.2% for May.