20 November 2023: Hunt plans a “Budget for Growth”

History may show that this was the week in which the Conservatives began to fight back to try to narrow the yawning twenty-five-point gap between it and the Labour Party in the polls.

The market’s focus will be on fiscal policy rather than monetary policy, with which it has been obsessed for several months.

Chancellor of the Exchequer, Jeremy Hunt, will present his Autumn Statement to Parliament.

He has been under pressure from his back bench colleagues to deliver tax cuts, and it seems likely that he will acquiesce to their demands, at least partially.

He is expected to cut taxes for businesses and reduce inheritance tax, but any change to the basic rate of personal taxation will have to wait until the Spring.

Furthermore, he is also expected to make permanent the policy, which allows firms to “fully expense” investment in plant, machinery and tech.

This was due to expire in two years’ time but has been praised as it marks an improvement in the massive under-investment that has been taking place in the country for more than ten years.

Companies are allowed to write off the cost of such items against their corporation tax liability, which boost cash strapped firm’s ability to become more competitive.

It is likely that Hunt will signal that cuts in personal taxation are “in the pipeline” but it is doubtful that he will make a firm commitment.

The publication of retail sales data last week provided the market with an opportunity to increase their bets on when the first cut in rates will take place.

Although inflation is still at twice the Bank of England’s target level, the market now believes that the first rate cut will take place by June next year.

Only recently, the Bank’s Chief Economist was agreeing with market sentiment that it would not be until August.

Apart from the Chancellor’s Autumn Statement, data for economic output is also due for publication this week. The best that the Government can hope for is that the figures are unchanged from last month, with the composite figure for manufacturing and services activity remaining at 48.7, just below the 50 level, which denotes expansion or contraction.

Last week, activity slowed down as the market took stock of future interest rate activity. Although neither the Bank of England, nor the FOMC has yet committed to the ending of their cycles of rate increases, the market is now considering when the first cuts will take place from all G7 Central Banks.

Sterling finished the week close to the top of its recent range, having received a boost from lower-than-expected inflation data from the U.S. It reached a high for the week of 1.2506 and closed at 1.2460.

Consumers in the U.S. are trying to make sense of several news articles which say that the U.S. economy is on the verge of a soft landing which allows unemployment to rise marginally which inflation continues to fall, while the FOMC remains hawkish, with several of its members speaking in support of Fed Chairman, Jerome Powell, whose recent comments have been about the possibility of a further hike.

While the market has significantly reduced its stance on further rate hikes, and bets on when the rate cut will take place are increasing, there is a nagging doubt in the mind of the “man in the street” that the Fed won’t tolerate anything less than constant progress towards its 2% target for inflation.

This is despite Powell warning that the fall in inflation cannot be expected to be linear.

This week sees the publication of the minutes of the last FOMC meeting and, while what is said is often out of date by the time of its release, since interest rates are at a critical stage where they are bordering on restricting growth but are more likely in a neutral state, the sentiments expressed by its members remain of more than passing interest.

In a week that will be shortened by the Thanksgiving Holiday, which takes place on Thursday but is extended by many families to take in Black Friday as well, it is unlikely that there will be any meaningful change in sentiment or momentum.

The market has totally discounted any thought of a recession certainly before the first half of next year, which means that the Fed will not expect to be pressured into a rate cut.

This will mean that it can take its time to ensure that inflation is at, or at least close to, its 2% before rates are cut.

The November employment and inflation reports will have a definite impact on the FOMC’s decision, and the market’s expectation is for a third consecutive pause will be announced.

The dollar took a hit from lower expected figures for inflation in October, which pushed the market even further down the path of believing that rate hikes have ended.

The index fell to a low of 103.85 and closed at that level.

It has been some considerable time since the Treasury made any comment about the level of the dollar, which is its responsibility. From that silence, the market assumes that it is content with where it is right now.

The ECB appears to be doing a fairly good impression of an ostrich by sticking its collective head in the sand in the face of an economy which, if not actually on its knees, is certainly heading in that direction.

Last week’s report by the European Commission saw it lower its growth forecast for the full year to 0.6%, down from 0.8% in the Summer.

What is astounding is that the Commission believes that after a fairly robust 2022 (driven by the economy’s emergence from the Pandemic) the economy has (in its words) “barely seen any growth in 2023”.

In fact, it has teetered on the edge of a recession since the first quarter.

Furthermore, it is expecting inflation to continue to fall while the economy performs a recovery. This is wishful thinking in the extreme since they do not see the need to enact any policies to create the backdrop for a recovery.

On a month-on-month basis, inflation actually rose marginally in October, driven by higher food prices and higher prices being charged for numerous services.

There is still a belief within the European Union that “greedflation” is an issue. This is when suppliers and retailers don’t pass falling costs on to consumers and is a form of profiteering.

Despite Christine Lagarde insisting that interest rates will remain unchanged for at least the first two quarters of next year, there is a growing view in the market that the ECB will be forced to cut rates around the end of the first quarter.

The Central bank has built a reputation for stubbornness, first by refusing to raise rates until it had withdrawn additional support it was giving to the weaker Eurozone nations at the end of the Pandemic, then delaying the end of its cycle of rate hikes by one or even two meetings.

Now, there is speculation that it will prolong any recession that takes place by not cutting rates promptly.

The era of low interest rates appears to have made G7 Central Banks less proactive when dealing with changes to their economies, and it remains to be seen if they have learned their lesson when growth disappears completely.

The data due for publication this week is unlikely to provide any solace. Output data for both Germany and the wider Eurozone is expected to show little or no improvement, with both services and manufacturing output deep in contraction.

Last week, the single currency gained from a bout of weakness for the dollar. It rose to a high of 1.0909 and closed, close to that level.

The market is not considering an assault on the 1.10 level since the Euro is not attracting any buying interest in its own right.

Have a great day!