4 November 2024: Charities, GPs and Care Homes count the cost of the budget

Rachel Reeves found out yesterday just how tough public scrutiny of her actions can be. It was the first time she had been subject to criticism for her policy decisions. In opposition, she had the comfort of being able to make non-binding comments about what she would do if she were ever to become chancellor. Still, now in the full glare of a TV studio, she was called upon to justify her decisions.

It would have been unedifying to be shown on video making quite recent commitments only to not follow through on them last week.

She said that she had made mistakes in the run-up to the election by promising that taxes would not increase for “working people”. One woman’s mistakes are another’s lies.

It was interesting that the new Conservative leader, Kemi Badenoch, followed her onto the programme and informed viewers that, naturally, she would have done things differently in Reeves’ shoes.

Badenoch defeated Robert Jenrick in a closely fought race to be Leader, and now her first task will be rallying a deeply divided Party behind her.

There has been no shortage of comment about the Budget. It has been called spiteful by British entrepreneur, James Dyson, while others believe that it has opened class differences which were considered to no longer be an issue.

Badenoch made two comments that would have divided her supporters. The first was that she would not have put VAT on private school fees since the level of criticism it has raised compared to the amount of money the levy would make is barely worthy of comment. She also said that she believed that “Partygate,” one of the scandals that eventually brought the Tories’ house to come crashing down,” was “overblown. “

She felt that the error was in issuing ordinary people fixed penalty notices for going about their daily lives during the Pandemic was counterproductive and led to the chaos that ensued.

The latest opinion polls place the two main parties neck and neck but with a huge majority and five years to allow their policies to come to fruition the Prime Minister and his Cabinet can, for now, rise out of the storm.

The market’s reaction to the budget has been mixed. Some commentators believe that Reeves has lost some of her credibility since the cost of Government borrowing has risen over the past few days, while others point to concerns about growth.

They feel that the increase in Employer’s National Insurance contributions is a tax on jobs which makes growing any business tougher, and it is a fallacy to suggest that increasing employer’s NI contributions will not eventually follow through in lower wage increases and job losses.

The pound was driven throughout last week by a mix of UK and U.S. news. A Trump victory in the U.S. election may see tariffs introduced and damage to the “special relationship”, while the prospect of a rate cut at this week’s MPC meeting is still a significant factor.

Sterling fell to a low of 1.2843 during the week but recovered to close at 1.2919.

There was a surprise in the Employment Report for October, with the headline number of jobs created falling to just 12k last month and the third-highest number of jobs created in history being downwardly revised to 223k.

While there may be some adjustments to the headline number given that the data was released on the first day of the month, barely allowing for it to be correlated in the usual way, it is doubtful that the revised figure would see its revision by more than 25k-30k, which would still be a significant fall.

Average earnings “ticked up” back to 4% while the unemployment rate was unchanged at 4.1% in a report which decides on whether to cut rates and, if so by how much at this week’s FOMC meeting, an even tougher choice.

The FOMC will do well to ignore the tumult which is building around tomorrow’s Presidential Election.

The past week has been more schoolyard than hustings as the candidates have traded insults. First, a Trump supporter labelled Puerto Rico as “an island of garbage”. This led Harris to “wheel out” several prominent Puerto Ricans including Jennifer Lopez at a later rally, while President Biden labelled all Trump supporters as garbage.

Trump then appeared at a rally in a garbage truck, which he said was a tribute to Biden and Harris.

Likely, tomorrow’s vote cannot come quickly enough for most political commentators, who are fearing the backlash no matter the result.

The very thought that Kamala Harris could be elected the next President will see Trump take on an even more curious hue than he has already, while a Trump victory will see volatility in global financial markets rise significantly.

Several geopolitical situations appear to be currently in abeyance, waiting for the result of the election.

Meanwhile, following the employment report, the data for economic output was also published on Friday. It showed that manufacturing output fell to 46.5 from 47.2, still well below the watershed level of 50 which separates expansion from contraction, while new manufacturing orders rose marginally.

If the FOMC is truly driven by the data, it should cut the Fed Funds rate by twenty-five basis points this week. Jerome Powell has been chastened by the criticism of the size of the last cut, and he and his colleagues will likely agree to cut by twenty-five points, to buy some time.

The dollar index performed surprisingly well following the disappointing Employment report. It closed on Friday at 104.32, well above its short-term support level of 103.80 which had been challenged earlier in the week.

The political and geopolitical events taking place at the moment are having a far greater effect on financial markets than relative economic performance. Over the past two weeks and for the two weeks to come, there will be significant shifts in the tectonic plates of global interaction.

Meanwhile, the Eurozone is still grappling with the twin threats of inflation and growth.

It seemed that the ECB had performed a major volte-face from being concerned about inflation to engineering an increased level of growth within the economy, having cut interest rates three times in quick succession.

However, more recently, Members of the ECB’s Governing Council have again become worried about inflation as the headline rate ticked up from 1.7% to 2% last month according to flash data.

It was no secret that inflation would rise towards the end of the year and, while the sudden uptick in food prices is surprising, it looks more like an anomaly.

Services are still sticky, but the report remains in line with core inflation settling around the 2% mark at some point next year, although there is still some dispute between the ECB and market analysts about when that will happen. Analysts seem to be more confident about that happening sooner rather than later.

The last ECB meeting heralded a shift in focus for policymakers from the current state of inflation to prospects for growth, and the surprise drop in unemployment corroborates last week’s GDP data in illustrating that there is little to panic about just yet.

A big concern underpinning the risks of inflation undershooting the target was a potential tipping point with the labour market, the surprising resilience of which could be at risk of a sharp unwind in labour hoarding if consumption worsens. That concern is no longer so significant.

Back-to-back 25bp moves are the way to go.

The need for below-neutral rates to rescue a contracting eurozone economy is fading from the discussion, and that negates the need to hurry the easing cycle, particularly with services inflation struggling.

The Eurozone economy expanded by 0.4 per cent in the third quarter, providing a boost for the region, where growth has faltered this year.

While the figure for the three months to September is slightly better than the 0.2 per cent rate predicted by analysts, the currency bloc’s economy has performed worse than expected throughout 2024.

That is expected to continue to improve throughout 2025.

The Euro has been something of a makeweight in global terms over the past couple of weeks.

Last week, it rallied to a high of 1.0905 and closed at 1.0834.

In early Asian trade, the dollar has seen significant weakness, leading the euro to rally back to a high of 1.0910 so far this morning.

Have a great day!