1 November 2023: Sunak to lay out election plans

The Prime Minister laid out his plans for the King’s Speech and the State Opening of Parliament yesterday as the Conservative Party prepares for the upcoming General Election.

The Economy and public safety will be at the centre of his plans, but following the revelations from former government adviser, Dominic Cummings, at the Covid Enquiry it is even more certain that there will be a change of Government sometime in the next twelve months.

Figures released yesterday revealed that insolvencies amongst companies are likely to reach their highest level since the height of the financial crisis fifteen years ago.

More than six thousand businesses have gone under with many still “teetering on the brink.”

Energy costs, rising salary expectations and, inevitably, rising interest rates have made it simply too costly to run small to medium enterprises, while the environment for start-ups is as bad as it has been in a generation.

The Government has stealthily withdrawn several schemes that it announced with great fanfare over the past four years that were designed to help small businesses survive their perilous first year of operation.

Having presided over record tax increases, the pressure is growing on Jeremy Hunt to cut taxes in the Autumn Statement, or at least announce plans for cuts in the Spring Budget. So far, he has resisted the calls, but he has subtly changed both the tone and inference of his comments recently which has raised the hopes of Conservative back benchers who fear for the safety of their seats.

A cut in stamp duty is the very least demanded from Hunt in a few weeks’ time. This would provide a “shot in the arm” to the housing market, while announcing the lowering of the rate of Income tax and raising the threshold for inheritance tax would be low-risk strategies and could be subject to future economic performance.

The meeting of the Monetary Policy Committee that will announce the latest decision on interest rates seems to be divided with last month’s 5-4 vote in favour of a pause expected to be repeated.

The pound has lacked any direction recently since its current drivers do not point in any particular direction. With traders mostly sidelined, commercial operations take over which results in less volatility and lower ranges. Yesterday Sterling 1.22 and 1.2120 and closed at 1.2153.

The outcome of the latest meeting of the FOMC which concludes today appears to be a foregone conclusion, although, if the committee is truly driven by the data, a further hike cannot be totally dismissed.

While members of the committee cannot be given any advance guidance as to the outcome of the October employment report, data releases that have taken place in the six weeks since the last meeting have pointed to an economy that is “forging ahead.”

Although no one expects that the economy has sufficient strength to match the 336k new jobs that were created in September, expectations are still for the headline to be close to 200k.

Jerome Powell is on record as saying that until the employment market has cooled sufficiently, the Fed will retain a “hiking bias.”

The ADP data of private sector job creation is set for publication later today. Last month showed that a disappointing 89k new jobs were created, and this put what is likely to be a final “nail in the coffin” of any perceived correlation between private sector job creation and the non-farm payrolls data.

FOMC members are more likely to concentrate on the inflationary effect of wage increases in their deliberations. They will have had their team of economists working to model what has happened over the past month to decide if wage inflation is falling.

Given the CPI numbers that were presented for September, again, there is a possibility that a hike could be agreed. Although the market still favours a further pause, the tone of Powell’s statement following the meeting will be important. It is doubtful that he will announce that the fed funds rate has peaked, particularly given the preliminary data published recently for Q3 GDP.

He may hint at what is likely to happen going forward, but if a pause is agreed at this meeting it would make a year-end fed funds rate of between of 5.50% close to certain.

The dollar index like all the major currencies is lacking a clear direction now. Yesterday it rallied close to its high for the month and closed at 106.72.

The ECB President has been strident in her message that interest rate hikes would only end when the Governing Council was convinced that inflation has fallen sufficiently to allow rates to stay at their peak for an extended period to see price increases close to their target of 2%.

The pan-Eurozone inflation data that was released yesterday provided total vindication of the decision to end the cycle of rate hikes at the meeting held last week.

Headline inflation feel to a rate of 2.9% in October, lower even than the most optimistic commentators had expected.

When looked at through the lens of the output and demand statistics that have been published recently, the Eurozone economy is headed for a period of stagflation despite the better-than-expected inflation data.

It is agreed that interest rates are now restricting demand to such an extent that it has pushed the economy to the brink of a recession.

Data released this week has shown that the German economy, the Eurozone’s largest, shrank in the third quarter due mostly to a drop in consumer spending. The same is true of France but not to such an extent.

Although the Eurozone economy has been “bumping along the bottom” for the past year, this quarter is almost certain to record its first contraction since the first lockdown in 2020.

Italy’s economy stagnated showing no growth as it teeters on the brink of a recession and Giorgia Meloni tries to convince investors that the country’s ballooning public debt is still under control.

If it is true that the full effect of interest rate hikes is only felt after a year, then demand still has some distance to fall, meaning that the region is heading for a very bleak winter. And that is without any further energy shock which isn’t out of the question.

The market came close to accepting that the cycle of rate hikes is at an end as the euro nosedived following the release of the inflation data. The common currency fell to a low of 1.0557 closed at 1.0575.

Have a great day!