22 October 2024: Will there be any beneficiaries from the Budget?

It is difficult to remember a Budget that is being anticipated with such trepidation as the one being prepared for delivery in a little over a week.

A Government, with a majority of more than 160, can do pretty much as it wishes. Still, Sir Keir Starmer wants to build on his party’s momentum going into July’s election. However, by most reckonings, Labour’s popularity has been hit hard by several policies which have been enacted which while not in absolute contradiction of manifesto pledges, come very close.

The removal of the pensioner’s winter fuel allowance has caused the most furore, for two reasons; first, it goes against Starmer’s pledge to support the most vulnerable members of society and, second, it is a very “unlabourlike” thing to have done.

Many changes that have come so far, and the unpopular items that are expected to be delivered next week, fall under the umbrella of “fixing” the gaping black hole which apparently exists in the country’s finances.

The Chancellor maintains that she was unaware that several commitments agreed upon by the previous government were unfunded. In a spirit of openness unusual for a politician, she is determined to expose all the skeletons in the cupboard. According to the previous Chancellor, she was well aware of the financial situation before taking office, but if she wasn’t, she should have been.

Furthermore, Jeremy Hunt denies that the black hole even exists.

Budgets are not intended to be popular, since they deal with how the country will raise money, and it is the spending review that will come later which will decide how those funds are spent.

Such diverse sectors of the economy from train drivers to junior doctors will barely have had time to spend their wage increases before those increases place their salaries in a tax bracket which sees their tax burden increase.

It is estimated that the changes to worker’s rights which were introduced recently will cost small businesses upwards of five billion pounds, yet an increase in employer’s national insurance contributions is expected next week.

This is as close to a manifesto contravention as it is possible to make, since Reeves pledged not to increase NI contributions, she just omitted to limit the pledge to employees.

Millions of pensioners will miss out not just on their winter fuel payment, but single pensioners also face their council tax discount removed.

While mortgage payers have seen their outgoings fall following the recent interest cuts, the removal of the cap on the fuel levy as well as the continuation of the freeze on tax thresholds will see that windfall reduced.

It is hard to see who, if any, will benefit from the measures set to be introduced next week, and while the Government will point to the likely improvements in the country’s finances that will come as a consequence of the Budget, this will come as cold comfort for a large proportion of the electorate to support who supported Labour and voted for real and positive change.

The financial market is preparing itself for a significant increase in volatility over the next two weeks, with several key decisions to be made, which include the Budget. A U.S. rate decision, a pivotal delivery of U.S. employment data and a rate decision will be overshadowed by a seminal Presidential election.

The pound tested the bottom of its short-term range yesterday, as a rate cut at the next meeting of the MPC remains a possibility.

It fell to a low of 1.2977 and closed at 1.2985.

Dallas Fed President, Lorie Logan, summed up a growing feeling that has been expressed recently by several other Fed Presidents, that the economy is not as strong as recent data releases have depicted, while there is a real possibility that a further cut in interest rates could reignite inflation.

“Two takeaways stand out to me from the current economic and financial picture,” Lorie Logan said in a speech in New York. “First, the economy is currently strong and stable. But second, meaningful uncertainties remain in the outlook.”

Logan noted the labour market has weakened since the spring, but she asserted there are “still upside risks to inflation.”

As a result, she said the Fed needs to proceed carefully in reducing high interest rates put in place from 2022 to 2023 to slay high inflation.

The appropriate policy strategy depends on whether the path ahead is clear or cloudy,” Logan said.

Logan’s colleague on the FOMC, but not currently a voting member, Neel Kashkari from Minneapolis, echoed Logan’s views. He noted that while the Fed is on the lookout for a rapid destabilization in the US labour market, investors should expect a modest pace of rate cuts over the next few quarters.

He went on to speculate that given the resilience of both the economy and employment, maybe the neutral rate is higher than previously believed. The neutral rate is a level at which it neither supports nor restricts the economy.

He also expressed surprise that, given the nature of recent geopolitical events, the oil price is relatively subdued. A barrel of WTI oil was costing a little over $70 yesterday.

Overall, monetary policy is designed to lower inflation and not reduce demand, according to Kashkari.

Both Logan and Kashkari highlighted a trend among FOMC members which has been for them to be less bullish over recent weeks, although none are predicting the need for another jumbo rate cut next month.

No matter the outcome of the Presidential election, which is just two weeks away, the result will be groundbreaking. The U.S. will elect either its first female President in history or only the second man who has returned to the Presidency after leaving the White House.

Although Kamala Harris is apparently ahead in share of the popular vote, the results in “swing states” like Pennsylvania will determine the result. That is why both candidates and their “cheerleaders”—pop stars in Harris’s case and Elon Musk in Trump’s—are currently seen in and around Philadelphia.

The Dollar is still well-supported, even if it is not progressing rapidly. Yesterday, the index climbed to a high of 104.02 and closed at 103.98.

It has almost erased its losses from the summer when the ECB was expected to be less aggressive in its cycle of rate cuts, while the Fed was expected to begin a series of regular cuts.

Yesterday’s close was its highest since July 18th.

Christine Lagarde has been reluctant to declare victory over rising inflation, even though the headline rate fell significantly below its 2% target last month.

An official report from the ECB published yesterday claims that it will take at least the end of the third quarter of next year for inflation to be sustainably at 2%.

This prediction is at odds with the market’s view that the pace of deflation is such that victory could be declared by the end of the year if it were so desired.

It is definitely the case that the ECB has pivoted from being concerned about inflation to considering how to promote growth.

The Governing Council’s most hawkish members have “toned down” their comments in recent months as they agreed back-to-back rate cuts over the past couple of meetings to active seventy-five basis points of cuts overall.

The markets are always voracious in their desire to be fed a diet of advance guidance, so speculation about a further cut this year is rife.

The catch-all phrase of data dependency has again been “trotted out” by Lagarde who has no desire to appear at odds with her colleagues.

The Governor of the Central Bank of Lithuania, Gediminas Simkus, spoke yesterday of his view that interest rates may already be below what he considered close to their “natural level.”

“If the disinflation processes get entrenched, rates may be lower than the natural level,” Simkus, told reporters in Vilnius.

With faltering Eurozone economic growth and the inflationary pressures below the bank’s target of 2%, investors expect the ECB to cut its borrowing rates again in December. This is a clear indication that they feel the ECB believes, contrary to its official line, that the fight against inflation is over.

While Lagarde spoke recently of her view that a eurozone recession is neither her nor her colleague’s base case, every effort is being made to avoid such a result.

It is well known that the region’s largest economy, Germany, is in recession and its second largest, France, is experiencing major budgetary issues. However, several of the countries that were “squealing” over the level of interest rates are now, if not thriving, then certainly performing above expectation.

As ever in such a large and unwieldy group, the Central Bank is facing an unenviable balancing act even as it seems to have its “duck in a row.”

The Euro is in a steady but constant downward trend currently, which is likely to remain as long as the ECB retains a dovish bias. It fell to a low of 1.0811 yesterday and closed at 1.0815.

Have a great day!