Harris moves the dial for the democrats as UK economy suffers setback

By Kathleen Brooks, research director at XTB

UK economy as the Labour government gets comfortable

After a strong run since the start of the year, the UK economy failed to grow in July and the 3 month growth rate was 0.5%, just shy of the 0.6% expected.

However, the details of the July figures do not bode well for Q3 growth. Manufacturing, industrial production and construction all suffered falls, leaving service growth shouldering the hard work. However, even services are showing the strain. The index of services rose by 0.6% over the last 3 months, but by a mere 0.1% in July. The UK consumer is struggling under high inflation and interest rates and it is starting to impact growth. 

The slowdown in momentum comes just as the Labour government gets comfortable in Downing Street after running on a platform to boost growth and UK productivity. This report shows that they have a lot of work to do. The focus will now switch to the budget at the end of next month. Can Rachel Reeves and co. boost growth amid the gloom of their fiscal inheritance? The markets will be hoping they can. 

The impact of a flatlining UK economy has weighed on the pound on Wednesday. And the data may open the way for the market to price in slightly more interest rate cuts at the BOE. The UK economy is expected to return to full capacity at the end of this year, so a downside surprise for growth may ease some fears about inflation returning to the UK economy. However, if Labour want to deliver on their growth promise, they will need to use the canvas of next month’s budget to draw a palatable plan for households and businesses to boost confidence and inspire spending growth rather than knock confidence with threats of tax increases and spending cuts. 

Will cable impact the BOEs decision? 

Any sell off in GBP/USD could be short lived as we wait for more direction about the Fed’s next move from today’s US CPI report. Cable found good support ahead of $1.31, suggesting that the market does not think today’s GDP update will force the BOE into panic cutting interest rates just yet. 

Harris/Trump debate outcome 

Elsewhere, Kamala Harris’s first election debate against Donald Trump was a triumph. She is emerging as the winner from last night’s debate, and the polls have moved in her favour. The pollster FiveThirtyEight predicts that Harris will win 47.1% of the vote, a gain of 2.7%, with Trump on 44.4%. After a dip in support over the summer, Harris has put her campaign back on track with her first debate performance. 

However, there is still a long way to go before November’s election, and it’s worth noting that Hilary Clinton was considered the winner in all of her debates against Trump in 2016. However, back then he was an unknown quantity, whereas now Harris could push him on his time in office and the insurrection at Capitol Hill by his supporters after the 2020 election. She took opportunities to skewer Trump on some of his most extreme positions, while Trump seemed to miss opportunities to attack Harris. 

Harris and her team have challenged Trump to another debate in October. He said that he will think about it. The Vice President will be hoping he accepts and she can pull off another performance like last night. 

The market reaction also suggests there has been a shift in support towards Harris. The debate puts Harris’s agenda back in focus, which is good news for EV makers, renewable energy firms, and even cannabis stocks. Trump’s disappointing performance was reflected in the price of bitcoin. It fell more than 2% overnight. The crypto currency is linked to Trump because of his support for crypto trading and throughout this campaign he has said he wants to make the US the crypto trading capital of the world. Thus, expect more volatility for bitcoin and other crypto currencies and stocks for the rest of this election cycle. 

US Stock futures are lower on Wednesday, the dollar is also weaker, especially against the yen, and USD/JPY fell 0.8%, after hawkish comments from a BOJ official raised the prospect of a Japanese rate hike later this week. 

How are commodities reacting?

Commodities will also be in focus today. The oil price is bouncing back, and Brent crude is attempting to get back above $70 per barrel, after falling nearly a fifth in the last month. Brent is now lower by 10% YTD, on the back of growth fears in China and the US. We think that the commodity market is overreacting, and the decline in commodity prices is due to supply concerns along side some concerns about growth. However, we think that the sell off is now over extended and there could be an opportunity to recover from here. Oil stocks are also worth watching after BP saw its market cap fall in USD terms to 2010 levels (excluding covid), when BP was dealing with the Gulf of Mexico oil disaster. 

There is no such disaster right now, which also supports the view that the commodity sell off is not entirely justified. So what is going on? Gold could also make another record high this week, which also suggests market nervousness.

We believe that seasonality along with fear of the unknown as we embark on a shift in global monetary policy, a US presidential election and questions about  the rally in AI stocks, is keeping investors on the periphery right now with a bias towards safe havens. Next week’s Fed meeting will be key to determining if investors continue to exhibit this behaviour.