Daily Comment (June 11, 2024)

by Patrick Fearon-Hernandez, CFA, and Thomas Wash

[Posted: 9:30 AM ET] | PDF

Our Comment today opens with notes on eurozone monetary policy and further details on the weekend elections for the European Parliament. We next review several other international and US developments with the potential to affect the financial markets today, including a knife attack on four US teachers in China and signs of a potential dockworker strike against the US’s major East Coast and Gulf Coast ports later this year.

Eurozone: In a joint interview with European newspapers, European Central Bank President Lagarde warned that her institution may not necessarily keep cutting its benchmark interest rate after doing so last week. According to Lagarde, “We are not following a pre-determined path . . . There could also be phases in which we leave interest rates unchanged.” The statement is a reminder that persistent price inflation and the Fed’s “higher for longer” policy will limit how much the ECB can ease policy to bolster economic growth.

Germany: In another sign that Russia’s invasion of Ukraine has prompted European leaders to start seriously preparing for war, the German government has updated its wartime mobilization and civil defense plan for the first time since the Cold War. Among other measures, the “Framework Directive for Overall Defense” calls for reinstating conscription into the armed forces, forcing skilled laborers and professionals to work in certain defense-related roles, rationing food and fuel, and transforming subway tunnels into bomb shelters.

France: Following up our discussion in yesterday’s Comment about the European Parliament elections and French President Macron’s decision to call snap elections in response, we want to clarify that Macron himself will not be on the ballot, as his presidential term runs to 2027. The elections, starting June 30, will only be for the national parliament. Initial press reports suggested that the centrist-liberal Macron called the election as a reluctant response to the surging popularity of France’s hard-right National Rally party, but we see another possibility.

  • National Rally won some 32% of the European Parliament votes in France, more than twice the tally for Macron’s party. However, the European Parliament has relatively limited power in European Union governance, so many French voters may have seen the balloting as a chance to register dissatisfaction without much practical impact. Macron is probably betting that French voters in the runup to the election will have to face up to National Rally’s actual agenda, potentially eroding its support and making it lose.
  • Macron is probably also calculating that if National Rally wins the election and installs its leader, Jordan Bardella, as prime minister in a “cohabitation” relationship with Macron, the hard-right party for the first time will face potential voter backlash for its actual policies.
  • In sum, it appears that the wily Macron is gambling that even if he can’t make National Rally lose the parliamentary election, two years of hard-right control over parliament will undermine it and ensure that it doesn’t win the powerful presidency in 2027. Of course, the risk is that the hard right doesn’t fall on its face in the campaign or in parliament, leaving it even stronger in 2027.
  • Amid this risky political backdrop, French stocks and bonds continue to sell off so far today. More broadly, the euro (EUR) today is trading down another 0.3% to $1.0730.

(Source: Wall Street Journal)

Belgium: The European Parliament elections also shed further light on Belgium, which is often seen (by outsiders) as ripe for disintegration into its Flemish north and culturally French south. The center-right New Flemish Alliance retained its position as the country’s biggest party, with 25.6% of Flemish votes, while the separatist Vlaams Belang party only increased its support to 21.8%. In response, Prime Minister Alexander De Croo resigned, setting the stage for a new government that will probably be inclined to give more autonomy to Belgium’s regions.

United Kingdom: Including bonuses, average weekly wages in the three months ended in April were up 5.9% from the same period one year earlier, matching both the expected increase and the increase in the three months to March. With wage growth elevated, inflation pressures still high, and the Fed holding rates high for longer than anticipated, it remains to be seen whether the Bank of England will start cutting its benchmark interest rate in August, as many investors expect.

Australia: The May NAB business confidence index fell to a seasonally adjusted -3, compared with +1 in April, while the business conditions index fell to +6 from +7. Importantly, several price indicators in the report pointed to accelerating cost growth, despite Australia’s current weak economic growth. The report suggests that price inflation remains an issue worldwide, potentially discouraging a range of central banks from cutting interest rates.

United States-China: Four US teachers on an exchange program in the northeastern Chinese city of Jilin were stabbed in a knife attack in a public park yesterday. Video footage indicated that at least three of the teachers were seriously wounded. The incident appears to be an isolated crime, but with US-China tensions so high, we can’t discount the possibility that it will become a new issue poisoning the relationship and creating further risks for investors.

US Monetary Policy: The Federal Reserve begins its latest policy meeting today, with its decision due tomorrow at 2:00 PM ET. With price pressures still high, the policymakers are expected to keep the benchmark fed funds interest rate unchanged at 5.25% to 5.50%. Just as important, the officials will also release their updated economic projections, including their “dot plot” of expected rate changes going forward.

  • Based on interest-rate futures pricing, investors currently look for the Fed’s first rate cut in the autumn. The biggest uncertainty is whether the policymakers will implement further cuts later in the year.
  • Because of today’s sticky inflation, we continue to believe the policymakers could keep rates “higher for longer” than investors currently believe.

US Corporate Governance: Data from ISS-Corporate shows that through the first five months of 2024, shareholders in S&P 500 companies have forced 70 votes on measures against traditional environmental, social, and governance (ESG) initiatives, up from 30 such votes in the first five months of 2022 and just 7 in 2020. Anti-ESG moves are now the fastest growing type of proxy proposal. However, most of the anti-ESG proposals have received support from less than 2% of shares voted, and none have passed.

US Shipping Industry: The International Longshoremen’s Association has canceled talks on a new labor contract covering dock workers at the nation’s East Coast and Gulf Coast ports to protest the expanding use of automated machinery at some facilities. Canceling the negotiations with the ports raises the risk of a strike when the current contract runs out on September 30. Such a strike would disrupt the supply of many goods sold during the holiday season, boost prices, and buoy consumer price inflation.

  • Separately, the Port of Baltimore’s main channel fully reopened yesterday, once again allowing full operations at one of the biggest East Coast ports.
  • The reopening came 11 weeks after a container ship slammed into the Francis Scott Key Bridge, bringing it down and blocking the passageway.