31 January 2024: Buyers are returning to the housing market

The Chancellor of the Exchequer has been warned that the UK would be better off by boosting public spending in several key areas of the economy rather than cutting taxes.

The Fund’s economists stopped short of calling the tax cuts an election gimmick, but they believe that they may not be possible without additional borrowing or post-election spending cuts.

The damage to public finances by the support that has been given by Ukraine and the continuing cost of the Pandemic needs to be repaired while maintaining high-quality public services and undertaking critical public investments in transport infrastructure and the NHS would be a far better use of any windfall.

In any other year, Hunt would probably agree, but he needs to contribute to the attempt to win the election, and he needs to get voters “onside”.

The IMF has the luxury of simply being able to comment on what it believes would be best for the UK economy, irrespective of any outside pressures.

Whenever the election happens, it remains more likely that it will be Rachel Reeves than Jeremy Hunt who must deal with any shortfall come the Autumn.

Hunt disagrees with the IMF’s assessment. He spoke yesterday of the need for the introduction of capital spending tax relief and the cut in national insurance to bolster investment in plant, machinery and tech.

He did however say that it is too early to forecast that tax cuts would be included in the Spring Budget, although to not deliver now would lead to a mutiny by Conservative backbenchers and almost certain humiliation at the ballot box.

According to the IMF’s forecast, the economy will continue to struggle to grow over the next two years and will be one of the worst performers in the G7.

It expects growth to be 0.6% this year and 1.6% in 2025. It made no mention of the election, as it needs to be seen to be impartial.

In any event, it would be difficult to comment on the Labour Party’s plans for the rejuvenation of the economy since they haven’t yet committed to anything other than high-level theoretical ideas.

The latest meeting of the MPC will begin today, with Andrew Bailey certain to announce that rates will remain unchanged tomorrow morning. While the permanent members of the committee will vote for no change in rates, Swati Dhingra and Catherine Mann continue to have polar opposite views of the effect of earlier rate increases.

Dhingra believes that the last of the rate increases were unnecessary since hikes take a considerable time to work their way through into the economy, while Mann is still concerned about a flare-up in headline price increases.

Sterling initially lost ground yesterday morning, falling to a low of 1.2640 but recovered later in the day, closing at 1.2695.

The market will most likely want to wait for the outcome of the FOMC later today before committing itself to continuing or adding to the strength that the dollar index has been exhibiting lately.

Although no one seriously believes that Jerome Powell will do anything other than announce that the committee has voted to leave interest rates unchanged, his press conference will draw the attention of investors and traders, who will comb through his words for clues about when cuts will begin.

Although several FOMC members have already said that they feel that it will be right for cuts to begin in the summer, a lot will depend on the performance of the jobs market in the intervening months.

Barring unseen events, it appears that interest rates are currently sufficiently restrictive upon demand to see inflation continue to fall, although the closer it gets to the Fed’s 2% target, the slower the incremental fall will be.

This week sees the release of the first employment data relating to January.

The number of job openings rose again when the data was released yesterday. This shows that there is still a degree of tightness in the labour market. Still, it is the number of private sector jobs created together with figures for job cuts due for publication today and tomorrow and Friday’s non-farm payrolls that will be most closely observed by the FOMC.

The current prediction for Friday’s headline number is 180K new jobs created, down from 216k in December. The market believes that the rate hikes that took place last year will have a dampening effect on employment, but so far that has not been the case.

The unemployment rate may “tick up” very slightly from 3.7% to 3.8% but overall, the jobs market still is tight. Wage increases are expected to be unchanged at 4.1%, which will concern the FOMC since they are still above the inflation rate.

The dollar index is still in an ever-shrinking range. The longer it stays, the more explosive the break-out is likely to be. Yesterday, it fell to a low of 103.31 and closed at 103.40.

In a speech yesterday, ECB President Christine Lagarde warned that a victory of Donald Trump in this year’s Presidential Election will lead to tariffs being placed on U.S. imports of goods manufactured in the Eurozone.

Trump introduced several protectionist policies during his earlier incumbency and remains of a similar opinion. His most radical threat was to “bring home” the country’s manufacturing capability which has been “exported” to China over the past twenty-five years, although given the tightness of the labour market if he were to consider making similar threats now, they would be meaningless.

Lagarde believes that Europe should be introducing safeguards to protect itself against any future economic threats. Tit-for-tat measures would be pointless since the Eurozone imports little other than essentials from the U.S. so any actions would be pointless.

Trump has been critical of the contribution to NATO’s budget that Europe makes, and it is doubtful that he can differentiate between non-Eurozone members and those who are.

Lagarde’s comments go some way to proving the comments that were made in a recent survey that she is too heavily involved in political issues and needs to supply more input on the “nuts and bolts” of the economy.

The GDP data published yesterday showed that the German economy contracted by 0.3% in the fourth quarter after flatlining in Q3.

Both Italy and Spain performed better than the market had expected. The Italian economy grew by 0.2% QoQ while in Spain growth was 2% over the same period. The data means that it is becoming less likely that the entire Eurozone will see a recession this year.

This will reduce the pressure on the ECB to cut rates and goes some way to explaining the hawkish comments that have been made recently,

The Euro is in a downward pattern on the medium-term charts since despite the hawkish stance of the ECB, it is unable to attract solid buying interest.

Yesterday, the single currency made modest gains, rising to a high of 1.0857 and closing at 1.0844.

Have a great day!