Pushing the Walls

The “big news” from the weekend was of course Joe Biden’s decision to withdraw from the presidential race and endorse Kamala Harris. We would be surprised if any Democratic candidate would offer a significantly different economic agenda from Biden’s. This suggests the most “disruptive” platform, from a market and macroeconomic point of view, remains Donald Trump’s. Last week’s ECB press conference was to some extent a disjointed affair: while we found the macro narrative quite dovish, expressing a fairly robust confidence, disinflation will continue despite some gyrations in the monthly data, Christine Lagarde remained tight-lipped on the next steps. We suspect the Council is divided, and the political context in key member states – even if France was not mentioned by name – may trigger tactical positioning by some hawks who don’t want to send to potentially spendthrift governments the signal that full-on monetary policy accommodation is just around the corner. Genuine concerns about the resilience in services prices adds to this reluctance. We still maintain our baseline of two more reductions in the policy rate this year (September and December). In the UK, the King’s speech, in which the government lays out its priorities, was quite prudent in the macroeconomic realm. We still think that the cabinet will need to “push the walls” to find enough policy space. The feedback loop from monetary policy to the fiscal constraints is particularly tight in the UK because of the Treasury’s indemnification of the BoE for the QE-related losses. The UK government has a vested interest in maintaining a modest fiscal stance to maximise the chances the BoE will cut quickly. In France, the left’s failure to secure the Chair of the National Assembly confirms they are not in a strong position to secure the Prime Minister job, but finding a robust enough political solution remains elusive.