Inflation/Deflation

Our labor market indicators have softened meaningfully during the past month but aren’t yet signaling an imminent recession. That said, the Fed can no longer ignore the labor market with the unemployment rate above 4% and rising.

The new Labour government will have flexibility to respond to macro shocks, which is positive for the UK in general, namely GBP-EUR, and also gilts in absolute terms. But over the long run, tax hikes will likely surprise to the upside, which poses a risk to corporate earnings.

Does the incipient slowdown in European data herald a soft landing and a goldilocks period for equities? We have our doubts.

Our Portfolio Allocation Summary for July 2024.

Concerns about the global economy have shifted from sticky inflation to faltering growth. Tight monetary policy is finally starting to bite. We suggest increasing portfolio defensiveness.

The Labour Party’s comeback in the UK is widely expected and will lead to fiscal stimulus consisting of increased public spending with minimal tax hikes. But a sweeping single-party majority will reduce social unrest only at the cost of higher taxes over the medium term. The paradigm has shifted away from the Thatcherite low-tax regime of the now-discredited Tories. v

The bond market should sell off and drag stocks down on higher odds of a single-party sweep, policy uncertainty, unorthodox Trump presidency, aggressive tariffs, large tax cuts, large budget deficits, labor shortages, a fired Fed chair, and higher inflation.