The essence of politics is compromise, and that principle may have been central to Sir Keir Starmer’s decision to step down as Prime Minister on Monday. After weeks of mounting pressure from Labour MPs to provide a timetable for his departure, against a backdrop of rising support for the Reform Party, Starmer chose to effectively hand over the reins to Andy Burnham.
Governing the United Kingdom increasingly appears to be an impossible task, with Starmer becoming the sixth Prime Minister to leave office in recent years. There is unlikely to be a contest for the party’s top job, as Wes Streeting, the former Health Secretary and a potential contender, has already declared his support for Andy Burnham. It is widely expected that Streeting will be rewarded with a senior role in Burnham’s government, with some speculating that he could be appointed Chancellor of the Exchequer.
Huw Pill, the Bank of England’s Chief Economist, was one of two members of the Monetary Policy Committee who dissented at its most recent meeting, voting in favour of a 25 basis point (0.25 percentage point) interest rate increase. Speaking on Wednesday, Pill outlined his views on monetary policy, arguing that it must remain adaptable and be designed to operate effectively in an environment of persistent uncertainty. He noted that, as central banks increasingly face unpredictable economic conditions, traditional forecasting models may become less reliable, requiring more emphasis of scenario analysis and stress-testing policy decisions. In particular, he warned that inflation could prove more persistent than currently expected and stressed that the Bank should remain prepared to tighten monetary policy further should inflationary pressures re-emerge.
In the United States, the Federal Reserve’s preferred measure of inflation, the Personal Consumption Expenditures (PCE) price index, rose to 4.1% year-on-year in May. This marked the first time inflation had exceeded 4% in three years, reflecting the continued impact of higher energy prices following the US-Iran conflict. With both countries having since signed an initial peace agreement, oil markets have stabilised, and WTI crude has fallen below $70 per barrel, leaving prices lower than they were before the conflict began. As a result, some easing in energy-driven inflationary pressures is expected in the coming months. Nevertheless, financial markets have increasingly priced in the possibility of a Federal Reserve rate hike, with some investors anticipating that further monetary tightening could come as early as September.
US equity markets came under broad selling pressure at the start of the week amid growing concerns that valuations in AI-related stocks had become increasingly stretched. Investor sentiment was further weighed down by the prospect of a Federal Reserve interest rate hike, which added to fears that higher borrowing costs could dampen economic growth and corporate earnings.
However, sentiment improved following results from Micron, the US semiconductor company specialising in memory chips. After shares had fallen sharply during the first two trading days of the week, the company reported quarterly revenue and profit forecasts that comfortably exceeded analysts’ expectations. Micron also revealed that customers had committed approximately $22 billion in future purchases of its memory products. The announcement sparked a strong rally in the stock, with shares rising more than 20% by the close of trading on Wednesday. Further supporting investor optimism, Micron’s CEO stated that the company sees no immediate signs of memory chip supply catching up with rapidly growing demand.
There was also some sad news this week, as Alan Greenspan, widely regarded as one of the greatest Chairs of the US Federal Reserve, passed away at the age of 100. Greenspan guided the US economy through the 1990-1991 recession and the dot com boom of the late 1990s, while overseeing the second longest economic expansion in US history, a decade of sustained growth from 1991 to 2001. Throughout his tenure, he resisted calls to raise interest rates in response to inflation concerns that ultimately failed to materialise. His ability to balance economic growth with price stability and not bend to pressure earned him the reputation as one of the most influential and respected central bankers of his generation. A true maestro.
Alongside oil, precious metals have come under pressure this week. A backdrop of increasing US rate expectations and a rising USD led to gold dipping below $4,000 an ounce and silver below $60 an ounce. Whether the Federal Reserve will ultimately raise interest rates remains unclear. With oil now at pre-conflict levels, we believe many inflationary pressures could turn out to be transitory and we could once again be considering interest rate cuts not hikes in key markets.
Nathan Amaning, Investment Analyst
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