You cannot please all the people all the time!

The Office for Budget Responsibility announced following yesterday’s presentation by Chancellor Rishi Sunak of his spending and taxation plans that the tax burden in the UK would rise to its highest levels since the 1960’s when all of the deferred items kick in.

Sunak’s second budget was, in his own words, not popular but honest. Large firms will be taxed at a rate of 25%, rising from 19% starting in 2023, while by the middle of the decade 1.3 million more people will be paying income tax.

Most measures to reduce the level of Government borrowing were deferred until the recovery is well on the way to stabilising the economy while several of the measures put in place to provide support to those most affected were extended.

The furlough scheme will stay in place until September although employers will be expected to contribute 10% in July and 20% in August and September.

The stamp duty holiday remains in place while the scheme to support first time buyers that was announced recently will come into force immediately.

Sunak added that unemployment is expected to peak at 6.5% early next year, far lower than the estimates of 10%+ that were quoted at the height of the Pandemic.

Following the 10% contraction of the economy last year, growth is expected to be 4% in 2021 with pre-Covid levels reached in the middle of next year.

The IMF came out in support of negative rates yesterday, calling them an effective tool for spurring growth. This is an issue that continues to exercise the MPC with a decision to reduce rates having a lead-in time of at least six months.

Reaction to the Budget was, as one would expect, mixed, with representatives of various sectors commenting that more could have been done to help them in particular but overall, the plans have been recognised as being fair and providing support to allow the economy to grow before it is burdened with repaying record peacetime borrowing of £355 billion.

The pound was barely moved by the announcements, with investors preferring to allow the dust to settle on the various measures before committing. It traded between 1.4006 and 1.3920, closing at 1.3951.

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Bond selloff continues

The Federal Reserve could barely have done more to calm market fears regarding inflation, but the spectre of runaway price rises remains.

Several Regional Fed Presidents have clearly been tasked by Jerome Powell to ensure that the message continues to be heard that no matter if core inflation rises above 3%, the Fed is on the case.

For example, yesterday, Chicago Fed President Charles Evans commented that the Fed can deal with a rise to that level since it would be a temporary phenomenon driven by pent up demand.

He went on to say that the rebound in activity would be strong, that unemployment would be at around 5% by the end of the year and, returning to inflation, said that for the FOMC to even begin to consider inflation, it would need to exceed 2%.

It was a day for scouts to be sent out to calm markets as Evans was joined by Philadelphia Fed President Patrick Harker. He commented that he believed that growth of 6% this year was not out of the question while any rate rise would not be seen until the end of 2023.

Harker did comment that vaccine hesitancy needs to be addressed before it becomes an issue.

Unemployment data will begin to be a driver from today, with jobless claims and challenger job cuts due for release later. While the Challenger data is not expected to be anything more than curtain raiser for tomorrow; s NFP, the market has begun to take notice of jobless claims which are considered to be a more real time indicator.

After last week’s positive result, traders are looking for that to continue with another fall expected in new claims to around 720k.

Tomorrow sees the release of non-farm payrolls with the market still a little pessimistic. New jobs are expected to be around 120k with the unemployment rate likely to remain close to 11%

Along with the rest of the market, the dollar index was prepared to wait for employment data yesterday. It rallied up to 91.06, closing at 90.98.

Suddenly high Government borrowing isn’t an issue

Members of the Italian Government who spent an inordinate amount of time fighting with Brussels over debt to GDP ratios must have been astonished yesterday to hear one commissioner comment that the rise in the overall debt to GDP ratio for the Union is close to 100% but that is acceptable due to low interest rates.

Several States have debt to GDP ratios now in excess of 100% while Greece is now close to 200%. Even at the height of the Sovereign Debt Crisis it never got above 90% and the current levels will start alarm bells ringing in Brussels especially if inflationary pressures lead to the need for higher rates even in a couple of years’ time.

The fact that the ECB is prepared to countenance such a high level of borrowing marks something of a success for the have-nots who have been campaigning for acceptance of their financial situation and greater support.

Even as pressure towards a stronger single currency subsides, The Governor of the Bank of Spain Pablo Hernandez de Cos, commented that the European Central Bank must monitor the currency carefully and also be aware of a rise in nominal interest rates that although being a drag on inflation could also hit growth.

While members of the FOMC appear to be singing from the same hymn sheet, members of the ECB’s Governing Council seem to have formed into very distinct groups.

The leader of the haves, German Bundesbank President, spoke of his stance on rising yields, while one of the have nots Spanish Vice President of the ECB Luis de Guindos said that the flexibility of the PEPP meant that it could still be increased in size.

The euro trod water yesterday. It traded between 1.2114 and 1,2032. Cloning at 1.2062.