Budget will look a little socialist

The minimum wage in the UK is set to rise from £8.91 per hour to £9.50 with the change to be confirmed in tomorrow’s budget.

This means an increase of just over £1.000 a year for a full-time employee.

The rise will, in Chancellor Rishi Sunak’s words, ensure that working pays and goes some way to ensuring that low pay is eliminated in this Parliament.

The rise in the minimum wage could bring the Government a problem when negotiations begin for public sector employees, since it is more than twice the rate of inflation.

A payment of £5.9 billion has also been announced for the NHS to reduce the backlog of operations caused by the lockdown and to improve the current length of waiting lists.

With Sunak set to unfreeze public sector pay increases, there is likely to be a backlash from the private sector, the management of which is a traditional Conservative stronghold.

Given the pain that the private sector has faced over the entire period of the lockdown, and in many cases is still facing, it will be considered unfair to ask it to fund a pay rise for the public sector. There have already been rumblings of discontent about rising taxes when the Government is also encouraging firms to invest in their businesses.

With inflation set to rise further in the winter with no end in sight to irises in the energy sector, the increase will be welcome but with private rents also increasing, particularly in inner-city areas, the increase soon becomes stretched to its limit.

The increase in minimum wage will be roughly similar to the £20 additional payment to those receiving Universal Credit that was recently removed. This will hopefully encourage a section of the public that had settled for receiving benefits without looking for work.

It marks a significant change in Government attitude in which those who are not working are punished being replaced by those who are employed being rewarded

The pound was well -in a narrow range yesterday. It reached a high of 1.3791 and closed at 1.3768. The Budget is likely to be overshadowed by the monetary policy intentions of the Monetary Policy Committee, which meets next week.

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PMI’s predict that strength will slowly wane

In the financial markets, everything is relative. The U.S. economy is still fairly strong, although the recovery from the Pandemic has waned a little.

This was expected, but a rate of growth that is lower than the previous quarter is likely to be interpreted as a slowdown, and concerns that the FOMC will act to reduce the level of additional support just when it is needed are growing.

Jerome Powell and his colleagues on the FOMC have admitted that they got their call wrong when it comes to the rise in inflation. However, in real terms it makes little difference.

It is true that the causes of the current rise in consumer prices is transitory and will not be completely relieved by the reduction of support. Any analysts who ask questions about the timing of the taper will be met with an answer of when is too soon and when is too late.

While Powell is paid the big bucks to make the correct call When there is no right answer, he must back his judgement and allow policy changes to feed through into the economy at every level.

Several observers have commented since the release of the September non-farm payrolls that the data wasn’t as bad as it seemed at first glance. There are several seasonal adjustments, particularly in education, which are yet to feed through and the revision higher in the August data is hopefully going to continue when the October headline is released next week.

Private payrolls increased, while the average earnings also saw a strong rise, although this was heavily eaten into when it is adjusted for inflation.

The inflation picture in the U.S. is also subject to a significant degree of interpretation.

In the so-called reopening sectors like airfares and airfares and used-cars price increases are beginning to moderate, demonstrating the transitory nature of the rises, while more hardcore sectors like rents and home sales are still rising.

The dollar is being positioned for another big week next week. The FOMC is expected to act to taper asset purchases, while as already mentioned, the October employment report will be released.

The dollar index remains below resistance at 94.20, reaching a high of 93.96 yesterday. It closed at 93.83 having again threatened the 93.50 support.

Need for generous economic support to remain after ECB

The ECB will begin its latest meeting tomorrow. The resignation of Bundesbank President Jens Weidmann will be high on the agenda for discussion outside the main chamber.

There is a great deal of speculation about what effect he can have on policy from outside the straitjacket of towing the Party line.

In terms of overall policy for the ECB in the next five years or so of President Lagarde’s initial tenure, it seems that the hawk is likely to band endangered species.

Although it was almost ten years ago, Mario Draghi’s famous whatever it takes speech marked the beginning of a new way of looking at the Eurozone economy which Germany, in particular, found itself to be just another opinion.

Just as Draghi wanted to save the euro, Lagarde has taken on a bigger job, saving the Eurozone.

Breaking down the inflation barrier to growth has meant that tinkering with policy to ensure that prices remain stable is a thing of the past. Support for the weak rather than succour for the strong has become the new economic doctrine.

It is likely that further down the road when recovery is complete, questions will be asked about fiscal discipline, but for now the doctrine remains whatever it takes.

Having seen the Head of its Central bank depart and its politicians struggling to find a coalition that will survive until the next election. Germany now finds itself assailed by crises on several fronts.

Economically, the country is slowing at an alarming rate. This not simply an interpretation of the facts, but the truth of higher energy prices a lack of both raw materials and spare parts and competition with Asia where quality has improved to such an extent that names like Mercedes and Miele don’t carry such significance.

The euro looks destined to head lower again unless the ECB springs an unlikely surprise this week.

It fell to a low of 1.1590 yesterday but recovered to close at 1.1610.