Sustainability. We mean it.
Article

PM calls snap UK election:

market snapshot

Insight
24 May 2024 |
Macro
With the UK headed to the polls in July, how, if at all, will the prospect of a new government impact monetary policy?

Fast reading

  • The UK will head to the polls in early July, after PM Rishi Sunak announces snap election.
  • New figures show UK inflation falling to 2.3% in April1, just shy of the 2% target set by the BoE but dropping lower than expected.
  • Nvidia blasts through sales expectations with Q1 earnings.

Off to the polls

UK Prime Minister Rishi Sunak made a surprise call on Wednesday by announcing a snap general election, with the public set to head to the polls on 4th July. The timing of the decision has raised eyebrows, with the Conservatives currently lagging behind in the polls and left with just six weeks to recover lost ground. The PM was required to call a general election before the end of January 2025, and it was widely expected he would call it sooner, but Wednesday’s announcement has nonetheless come as a surprise to many.     

Figure 1: Six weeks and counting…

Orla Garvey, Senior Portfolio Manager for Fixed Income at Federated Hermes Limited, points to steadily falling inflation as supportive of the incumbent party’s campaign.

“If we assume that the debate over the coming weeks will centre on how the Conservative Party have delivered inflation almost back at the Bank of England’s target, and with the economy picking up ever so slightly after the technical recession we saw late last year, this timing makes more sense. There isn’t a huge gap between the parties in terms of the impact on growth; a Labour government would likely see potential growth revised up but would be subject to the same limited fiscal headroom as the Conservatives,” she says.

The prospect of a new UK government is unlikely to impact the politically independent Bank of England, explains Garvey, who suggests data will remain the most significant influence on future rate shifts. Policymakers will meet for the last time on the 20th June before the public goes to polls, with all public statements since being cancelled (as is common practice during an election campaign).   

If we assume that the debate over the coming weeks will centre on how the Conservative Party have delivered inflation almost back at the BoE's target, and with the economy picking up ever so slightly after the technical recession we saw late last year, this timing makes more sense.

In latest figures released by the Office for National Statistics (ONS) on Wednesday, UK CPI stood at 2.3% in April – its lowest level in almost three years but still lower than expected. The latest data has made the prospect of rate cuts less realistic for June, with the second half of the year now looking more likely.

“Following this week’s reading, the probability of a June cut has almost dropped to zero, while an August rate cut sits at 50% and September at around 80%. The budget release post-election might also impact this probability, but assuming a Labour government would start out by respecting the fiscal limits, the budget shouldn’t be a meaningful one,” Garvey says.

“We continue to believe that the Bank of England will begin its easing cycle later this year, the increased uncertainty around the election and budget trajectory under a potential Labour government likely puts steepening pressure on the curve.”  

The numbers speak for themselves

Elsewhere in markets this week, Nvidia, the world’s largest chip manufacturer, has blown sales expectations out of the water with the release of its first-quarter earnings. The US company’s revenue for the first three months of 2024 grew to US$26bn, exceeding the US$24bn forecast made in February2. Its stock rose to above the US$1,000 per-share mark in response on Wednesday evening.

Figure 2: Nvidia earnings - AI darling on a tear

“A healthy dose of realism may be required as investors look for third- or fourth-order beneficiaries for AI, but the numbers speak for themselves,” says Lewis Grant, Senior Portfolio Manager for Global Equities at Federated Hermes Limited, on the latest numbers.

“While the current monetisation of AI is firmly in the infrastructure space, it’s hard to deny that the foundations are set to create something special. However, caution is still needed as not every AI development will be world and industry changing. For every revolutionary application of AI, there will be ten that are mere spin.”

However, Grant is patiently optimistic about developments in AI, and specifically its potential to improve products, focus marketing, and reshape cost structures, though he recognises these will take time to realise.

“Clearly there are also longer-term societal implications. The market will ignore these in the short term: sentiment is key, and NVIDIA’s results continue to fuel exuberance.”

To read more about a year in global elections, click here.

1 The Office for National Statistics, as at 22 May 2024.

2 The Financial Times, as at 22 May 2024.

Related insights

Lightbulb icon

Get the latest insights straight to your inbox