28 February 2024: Hunt is still mulling over rate cuts

Preparations for the Budget are entering their final stages, with the Chancellor still undecided about the size of the tax cuts he wishes to propose.

It is believed likely that there will be a return to “traditional Conservative values,” which would mean significant cuts to direct taxation. There is a possibility that Jeremy Hunt may gamble on growth returning to the economy to such an extent that his proposals may, at least in part, be unfunded.

This would mean that at the time of the proposal, the Treasury would be hoping that they can continue to provide services at their current level but will not have the resources to guarantee them without borrowing.

This is the process that Kwasi Kwarteng used when proposing his “Budget for Growth” when Liz Truss was briefly Prime Minister, which was not received at all well by the City.

Making unfunded proposals is a charge often levelled at the Labour Party, given its reluctance to “show its hand” when creating its manifesto for the General Election.

Hunt has “flip-flopped” between producing a radical budget that would give a significant boost to the Government in polls, or acting following what the Prime Minister calls “The Plan.” However, it is doubtful that such a course of action would be well received by Conservative MPs who are fearful for their seats.

Catherine Mann, the only true hawk left on the MPC, is scheduled to make a speech at lunchtime today. Mann has voted for hikes to continue, as she believes that there is still “secondary inflation” working its way through the economy, which may well flare up should rates be cut.

She has moderated her rhetoric a little recently, suggesting that data illustrates rates may be at the correct level, and hinting that she may change her vote, although she is unlikely to be in favour of a cut.

According to the Energy and Climate Intelligence Unit, the UK’s “green economy” is thriving and growing at 9% a year. While the size of this sector remains relatively small, its output is impressive. Thousands of new “green” companies were founded in 2023, creating 765k new jobs and contributing around £75 billion in goods and services to the overall economy.

The Government’s commitment to “levelling-up” is also well served by the green economy, since most of the start-ups are taking place away from the south-east of the country.

The pound ran out of steam yesterday as buyers became a little nervous about a more dovish outcome from the next MPC meeting. There was also some corporate buying of both Euros and dollars for end-of-month requirements. This saw Sterling fall moderately to a low of 1.2660 versus the dollar, although it managed to recover some of the lost ground to close at 1.2680.

The “crying wolf” that has become a feature of Congress as Republican members of both houses are being “whipped up” by supporters of Donald Trump to try to cause as much mischief as they can, to disrupt the plans of the ruling democrats by not agreeing a rise in the debt ceiling which would, “in effect” that the Federal Government would run out of money and be forced to close down.

Although this has become a regular occurrence over the entirety of Joe Biden’s Presidency, it is becoming more intense as Trump wants to show just how profligate the Democrat Party is and just how incompetent Biden supporters are when they get their hands on the economy.

Although it is almost certain that an 11th-hour solution will be found, there remains a slim chance that the issue could “become nuclear” with a shutdown taking place.

The ramifications of this would stretch far and wide across the economy. A shutdown would mean that the country’s credit rating would be affected, meaning that the Treasury would be expected to pay more to borrow, and existing liabilities would have to be extended since the Treasury Secretary, Janet Yellen, would simply not have the funds available to make the repayment.

President Biden met with the majority leader and the Speaker of the House yesterday and expressed confidence that a deal could be reached, although he did acknowledge the consequences of failure.

The Treasury Secretary chose to ignore the issue in a speech she gave yesterday, providing a glowing assessment of the state of the economy.

She dismissed the notion of the American economy entering a recession amid steady job growth and inflation under control. She acknowledged the geopolitical risks that may need to be addressed and urged Congress to approve aid to Ukraine and provide continued support to Israel, as well as her support for the continued military action against rebel Houthis in Yemen and the Red Sea.

“The economy is doing extraordinarily well, and the outlook remains positive,” Yellen told a gathering in São Paulo of the world’s twenty strongest economies.

The dollar index managed to stem its reticent run of losses yesterday, although it was not able to make much headway. It closed at 103.81, barely changed on the day, although it did reach a high of 103.91 earlier in the day.

Economic data that refers to the condition of the Eurozone economy since the beginning of the year predicts that growth will be almost impossible to find for the rest of 2024. The “bright spots” like Spain and Greece are being “dimmed” by the performance of less “nimble” economies like Germany and Italy.

Although there was no tier-one data published yesterday, today will see numbers released for economic sentiment as well as consumer and industrial confidence, business climate, and services sentiment.

The only area of the economy that is doing even remotely well is the services sector as countries like France try to reinvent themselves.

Paris is working hard to establish itself as a global hub for equity trading, creating a capability to settle trades in every market.

The rest of the economy is simply “bumping along the bottom” with an air of inevitability. It has become abundantly clear that some significant action needs to be taken to revive the economy.

Given how the Eurozone is structured currently, that support will have to come from monetary policy, since there is no unified fiscal policy that could initiate tax cuts. There is growing pressure on the ECB to initiate cuts in interest rates, but the overall feeling of the General Council is still hawkish, wanting to see a continued slowing of salaries before committing to what will be a series of rate cuts.

There is an overwhelming fear that there could be a backlash or flare-up in inflation that could lead the Central Bank to halt cuts, or in extreme circumstances reverse them. It seems that the ECB cares more about its credibility than driving the Eurozone economy into recession.

On Friday, harmonized data for inflation in the entire Eurozone will be published. It is expected that the rate of fall in prices will continue, and the market will expect some advance guidance about how this will affect the Executive Board and Governing Council’s attitude to cutting rates.

Before that, individual nations will publish their inflation data. Italy, for example, is expecting a slight increase in headline inflation, while Spain and Germany are both predicting significant falls due to lower energy prices.

The Euro was unable to maintain its recent rise and fell back to a low of 1.0833 yesterday and closed at 1.0844. Since the release of the U.S. employment report for February won’t take place for another week, traders will have to satisfy themselves with PCE inflation data which is due tomorrow, and manufacturing output, due on Friday.

If the PCE data experiences a downside surprise, the Euro may resume its uptrend, although comments from FOMC members may have more effect than the data.

Have a great day!