Sunak paints bleak picture

The UK economy is unlikely to return to pre-Pandemic levels before the fourth quarter of 2022. Unemployment will peak at 7.5% in Q2 of next year meaning the jobless total will reach 2.6 million. These were the stark outcomes from the Chancellors spending review that he delivered to Parliament yesterday.

While there were dire warnings for the future of the economy, the Chancellor announced two large new areas of investment.

First there will be a £4 billion fund setup for investment in areas that have missed out on funding in the past, while the Government’s restart scheme will receive £3 billion to go towards finding jobs for around a million people who are currently or about to become unemployed.

Equity markets appear to be providing a far more reliable guide to the performance of the economy recently. Yesterday, for example the pound reached its highest levels this quarter, despite the slowing economy and second lockdown.

The FTSE index reacted poorly to the news that the Chancellor predicts an 11.3% fall in GDP this year. While only falling by 0.64%, the footsie’s performance was in contrast to that of the Dow Jones Index which rose above the 30,000 level this week.

Government debt is expected to peak at £384 billion and there is little doubt that taxes will have to rise despite the public sector wage freeze that was announced yesterday. In order for the debt to GDP ratio not to rise, around £30 billion in tax rises and spending cuts would be necessary.

Later today, Health Secretary Matt Hancock will announce where the new regional tier system will be employed. The hospitality sector will be the most affected given the time of year. Q4 is the Golden Quarter for pubs, restaurants etc, and they make a disproportionate amount of their income between October and December.

Any such establishment in a Tier Three area will not be able to open other than for take-away and delivery which could easily decimate the sector. There will be a bi-weekly review of the suitability of each region’s Tier and the restrictions are likely to be in place until March.

The pound rallied to a high of 1.3393 versus the dollar, closing at 1.3391. It is impossible to say how far this rally can extend given the unusual circumstances both at home and abroad.

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Economy slowing but not drastically so according to data

The U.S. will experience its most bizarre Thanksgiving Day today.

With airports normally jammed tight with people travelling home to be with friends and relatives today will be vastly different. It is likely to be a celebration by zoom.

On the day following the Presidential election earlier this month there was a meeting of the FOMC. While Chairman Jerome Powell didn’t announce any new measures or adjustment to monetary policy, they would most likely have been lost in the fog of electoral confusion that existed then.

The minutes of that meeting were published yesterday. They contained no surprises, merely a confirmation that no adjustments were deemed necessary and the Fed remains prepared to act should the need arise.

Between the meeting and now, there have been several supportive comments from Regional Fed. Presidents. Some are currently serving on the rotating membership of the Committee while others will take over next year.

Each was supportive of both current policy and the Chairman’s comments, but most also referred to the regional nature of the spread of Covid-19 and its effect on their local economy.

Data released yesterday shows that consumer spending is holding up well. This bodes well as the Holiday Season begins with Black Friday tomorrow.

Consumer spending rose for the sixth straight month and the outlook remains positive despite the spread of lockdowns that have already begun.

The Fed’s favoured statistic on inflation, Personal Consumption Expenditures fell from 1.4% in September to 1.2% in October. This tallies with recent Fed comments concerning new ways of targeting price increases.

It was confirmed yesterday that the economy grew by 33.1% in Q3 although durable goods orders, which are a high volatile statistic, fell from 2.1% previously to 1.3% in October.

The dollar index remains under pressure. It fell to a low of 91.92 yesterday, closing at 91.99. With the final month of what has been an extraordinary year beginning next week, it is likely that both activity and volatility will begin to slow but as a prediction that only merits around 60% probability.

Von der Leyen still concerned about no deal Brexit

As a blind comment on the ability of the EU commission to source and purchase sufficient amounts of Covid vaccine to inoculate the entire EU population, yesterday’s prediction that there may need to be another full lockdown in Q2 of next year was telling indeed.

With the economy decimated by what has happened in both the first and second lockdowns, thoughts that further restrictions could lay ahead would be devastating.

In a sign that the EU is getting twitchy about the prospect of a no-deal Brexit, several officials have made dark comments and accusations this week.

The French Foreign Minister referred to the attitude of UK Negotiators as dragging their feet. Jean-Yves Le Drian told the French Parliament that the outcome of talks is still uncertain. He went on to say that the UK’s overtures in many sensitive areas remain insufficient.

As the talks drag on, it looks as if it will come down to which side wants a deal the most and is either capable or willing to take what is on offer from the other.

That is a judgement that is too close to call although both have said that unless they get what they want, they are prepared to walk away.

A deal remains likely although the time for both sides to adapt to what is agreed is running out rapidly.

To add to the war of words, the Irish Prime Minister said that there is still time for a good trade deal, while EU Commission President Ursula von der Linden commented that preparations for a no-deal outcome are advanced.

Several EU banks are beginning to virtually write off 2021 as a year of stagnation although there are stories circulating, that are yet to be confirmed, that the ban on banks paying dividends to stockholders is about to be lifted.

This would give a major boost to the sector but may not go down too well in countries that could see the funds created put to better use.

The euro continues to tentatively approach the 1.20 level versus the dollar. Yesterday, it rose to a high of 1.1929, closing at 1.1923. Many bank’s currency strategists labelled the 1.2920 level as being significant, so yesterday’s close above that level could open up the path to 1.20 which would be something of a nemesis for the ECB’s inflation policy.