22 November 2023: Hunt “to sound the charge” towards the election

Today is likely to see the beginning of the lead up to the General Election as Jeremy Hunt, the Chancellor of the Exchequer, delivers his long-awaited Autumn Statement to Parliament.

It was summer when the date for the statement was added to the Parliamentary calendar, and at that time Hunt stated that it was too early for cuts in taxation to be considered, given the state that the country’s fiscal affairs were in at the time.

Now, barely a few months later, the picture appears to have changed completely and Hunt has gone from agreeing that business taxes need to take priority to an apparent willingness to cut taxes across the board.

While lower taxes will be welcomed by the City, there is a concern about what compromises will need to take place to provide the funding necessary for the cuts to be made.

The country is crying out for investment in business to grow.

Deputy Bank of England Governor, Dave Ramsden, spoke yesterday of the “chilling” effect that Brexit has had on investment, diverting businesses’ attention to the red tape that has been introduced when leaving the European Union was supposed to lessen bureaucracy.

Ramsden believes that there is no doubt that Brexit has caused the rate of economic growth to fall compared to the period immediately prior to it taking place.

The Chancellors’ making permanent the Bill allowing firms to fully expense investment in plant, machinery and tech against their corporation tax liability is to be welcomed since it will take the pressure off firm’s ability to throw off the shackles of funding concerns to upgrade their operations.

Andrew Bailey gave a lift to Sterling, which was already climbing against the dollar yesterday, by testifying that in the view of the majority of the Monetary Policy Committee interest rates are at the right level to bring down inflation while allowing the economy to grow.

He told the Parliamentary Treasury Select Committee that rates would allow inflation to fall to the Bank’s 2% target.

Sterling rallied to a high of 1.2559 and closed at 1.2536 following Bailey’s testimony before MPs.

The odds strongly favour the MPC voting for a continued pause in the cycle of rate hikes at its meeting which takes place on December 14th although the market’s perception that rates have peaked may see Sterling also having reached its zenith in the medium-term.

There was a significant, if low-key, change to the Fed’s assessment of the economy announced by Jerome Powell yesterday, when he acknowledged that the risks to the economy are now equally balanced between growth and inflation.

This is the closest Powell is likely to come to acknowledging that the cycle of interest rate hikes is at an end.

It is quite a turnaround from only last week, when the Chairman was speaking of it being possibly “appropriate” for rates to rise again.

Although he has been in the job for over five years, he has not mastered the art of providing just enough information to Wall Street and no more, in the manner of many of his predecessors.

With a lawyer’s skill set, it is as if he is affronted to be expected to answer direct questions about his and the FOMC’s intentions.

However, gradually, the relationship has grown and blossomed, helped in the main by the Central Bank’s having moved to the cusp of providing a soft landing for the economy, when for all the world it looked like its hawkish attitude towards inflation which saw the fed funds rate climb to 5.5% would lead to a recession.

The publication of the minutes of the latest FOMC meeting did not really provide traders with anything they weren’t already considering. There was no expectation that the minutes would provide any clue of when the Committee would begin to consider rate cuts, and so it proved.

There have been several speeches made by FOMC members in the interim period, and without fail, they have erred towards the hawkish.

Since December 1st falls on a Friday, the November employment report is not due for release until December 8th.

It is always felt by the market that when there is a delay in its publication that the report is more accurate since there is more time for actual numbers to be incorporated rather than estimates and this leads to less subsequent adjustments.

The next FOMC meeting will take place a few days after the employment report is published, but the Committee should have sufficient time to digest the data prior to the meeting.

The dollar index fell to a low of 103.17 yesterday, but as predicted, bounced off the support at this level and managed to close higher on the day at 103.60.

Christine Lagarde has been strident in the view that interest rates are at a level sufficient to bring inflation down, while there was concern that the stubborn refusal to consider rate cuts even in the medium term (up to three months), would confirm that the economy is headed for a recession.

However, yesterday, Lagarde resumed her hawkish stance, warning that rates may need to increase if inflation stalls close to its current level.

She spoke of it being too early for the Central Bank to declare victory in the war against inflation, and that markets need to allow the bank time for the disinflationary factors now being seen to take place.

Despite renewing her hawkish credentials, Lagarde is expected to preside over a further pause in interest rates at the next meeting of the Central Bank’s Governing Council.

There is a nagging feeling amongst traders and investors that the ECB’s current position on interest rates is something of a compromise.

Rates may need to be cut, possibly as soon as January, to stave off a severe economic downturn, but the gap between the hawks and doves on the Governing Council is so wide that a pause, while not aiding the economy, will see inflation remain constant.

Lagarde, in her speech yesterday, called for greater cooperation between fiscal and monetary policy to drive growth in the economy.

Since the Eurozone sees itself as primarily a union geared towards exports, the shocks that have taken it in the global economy over the past eighteen months or so have provided a significant obstacle.

There is little question that intra-union trade needs to be encouraged to provide a solid basis on which exports can be developed.

The impact of higher borrowing costs will gradually dissipate, just as the energy shock of the past year is fading. This may provide a kick-start to the “growth engine.”

The euro failed to make progress in its drive towards the psychologically important 1.10 level yesterday, reaching a high of 1.0965 before running out of steam and falling back to close at 1.0911.

The market will begin to lose liquidity later today, ahead of the U.S. holiday tomorrow and while this will lead to narrow ranges, it may also see an increase in volatility.

Have a great day!