22 November 2024: Public sector pay deals increase Government Spending

The rise in Government borrowing. in October has been blamed on the level of wage increases granted to the public sector, according to City economists. Interest payments on debt also shot up to £9.1billion in the worst October since monthly figures began in 1997.

Chancellor Rachel Reeves has been criticized for handing bumper salary boosts to striking union members like junior doctors and train drivers.

Shadow Chancellor Mel Stride said: “They are a direct result of Labour’s decision to hand out inflation-busting pay rises to their union paymasters without any reforms in return.”

Jessica Barnaby, the ONS deputy director for public sector finances, said: “This month’s borrowing was the second-highest October figure since monthly records began in January 1993.

“Despite the cut in the main national insurance rates earlier in 2024, total receipts rose over last year. “However, with spending on public services, benefits and debt interest costs all up on last year, expenditure rose faster than revenue overall.”

Rachel Reeves also came in for fresh criticism from the bosses of Marks & Spencer and John Lewis yesterday over her £25 billion business tax raid in the Budget.

M&S chairman Archie Norman said the lowest paid would bear the brunt of the increase to employers’ National Insurance contributions.

His verdict came as the outgoing John Lewis chief executive, Nish Kankiwala, said his business faces paying ‘tens of millions’ in additional NI contributions.

Bank of England Monetary Policy Committee member, Catherine Mann, has continued to warn about interest rates. Responding to a question about comments made this week by fellow MPC member Alan Taylor, who suggested “gradual” meant reducing rates once a quarter. Money markets are pricing in around 70 basis points of cuts, implying two reductions and a strong possibility of a third.

Mann endorsed a so-called “activist” approach, which implies holding rates for longer, then delivering a larger cut once it was clear that “underlying inflation dynamics” had changed. The nine-member MPC cut rates for a second time this year on Nov. 7, with Mann the only dissenter.

At the other end of the spectrum, Taylor and Deputy Governor Dave Ramsden have signalled an openness to faster interest-rate cuts, with Ramsden singling out labour market developments as key.

The pound fell to its lowest level since May against the dollar yesterday, as comments on State Television by Russian President Vladimir Putin suggested a possible widening of the conflict in Ukraine. Putin said Russia needed to defend itself against American and British long-range missiles being launched into its territory, following the approval of Joe Biden and Keir Starmer of their use outside of Ukraine.

Sterling fell to a low of 1.2576 and closed at 1.2596 as the markets saw a significant lowering of risk appetite and safe haven flows towards the dollar.

Manufacturing output as measured by the Philadelphia Fed Manufacturing Survey fell into negative territory this month, falling to -5.5 following October’s rise to 10.3. This was significantly worse than the market’s prediction of a marginal fall.

Manufacturing activity in the Philadelphia region unexpectedly contracted this month, though firms remain upbeat about growth, according to a survey released on Thursday. The survey is considered to be a proxy for the entire country.

This was just the second negative reading since January with 18% of manufacturers reporting increases in activity, down from 24% in October, while 23% reported decreased activity, up from 14%.

New orders and shipments also declined but remained in positive territory, while employment turned positive, having been unchanged last month.

Data was also published for existing home sales. This week’s data releases have highlighted the difficulty facing the Federal Reserve in trying to decide on both the scale and level of interest rate cuts. Existing home sales rose by 3.4% in October, following a downwardly revised fall of 1.3% in September.

Chicago Federal Reserve President Austan Goolsbee reiterated his support for further interest rate cuts yesterday and his openness to doing them more slowly in remarks that underscore the ongoing debate about “it’s not about whether, but over how fast and how far” borrowing costs should be lowered.

Cleveland Fed President Beth Hammack echoed Goolsbee’s sentiments, commenting that more work still needs to be done in lowering inflation.

The chances of a festive rate cut have fallen further as the market reacts to comments from Fed officials.

Following the publication of the Philly Fed index, the market will be bracing itself for the release of the S&P Global manufacturing and services data later today.

Manufacturing is expected to stay in contraction, but remain unchanged at 48.5, while services output is predicted to have rallied to 55.3 after a read of 55 last month.

Manufacturing is at the heart of President-elect Trump’s threat to introduce tariffs on imports of finished goods, so the data will have wider implications than usual.

The continued “sabre-rattling” between Biden and Putin over Ukraine has seen the dollar index resume its aggressive uptrend. Yesterday, the index reached a new high for the year, reaching 107.16 and closing at 107.06.

Next week will be shortened by the Thanksgiving Holiday, but data for Personal Consumption Expenditures, Durable Goods Orders and Q3 GDP are set for release, as well as the minutes of the latest FOMC meeting.

Christine Lagarde returned to safer ground yesterday after providing her insights into the growing problems that face the wider Eurozone, as analysts see the region “sleepwalking into oblivion.

She commented on the ECB’s determination to “finish the job” and see inflation fall to be constantly at the Central Bank’s target of 2%.

Lagarde confirmed that the ECB is committed to bringing inflation down to the target of 2%. She said the council will make decisions based on careful evaluations of the economy and inflation trends.

She also noted that the eurozone economy shows signs of stabilization, but still faces challenges like stagnation and different inflation rates among member countries. While inflation is gradually improving, she stressed the need for caution to keep it on track.

There are several potential risks to the economic outlook, including geopolitical tensions that could impact energy prices, inflation, and overall economic stability in the eurozone. She discussed the importance of maintaining a supportive financial environment for growth while also managing inflation pressures.

Future policy changes will depend on economic data, and the ECB will keep assessing various indicators. Overall, her speech highlighted the ECB’s careful approach to monetary policy in a complex economic situation, with a focus on achieving price stability and supporting growth.

Market participants will be watching these developments closely.

So far, the European Union has managed to stay out of the conversation about Ukraine’s use of medium and long-range missiles to attack targets deep inside Russian territory. Ursula von der Leyen will face pressure from NATO allies in the coming days to make her position clear.

As well as German political disruptions, the escalating Russian-Ukrainian conflict is casting shadows, while investors dread the likelihood of new US trade tariffs on European products after the election of Donald Trump.

A weak growth outlook and looming U.S. tariffs on European imports threaten to reignite concerns over debt sustainability in the eurozone, the European Central Bank warned earlier this week.

Elevated debt levels and high budget deficits, coupled with weak long-term growth potential and policy uncertainty, increase the risk that fiscal slippage will reignite market concerns over sovereign debt sustainability,” the Bank said in a semi-annual Financial Stability Review.

The euro fell to its lowest level in more than a year as the multitude of pressure continued to grow. It fell to a low of 1.0462 and closed at 1.0472 as the market saw no reason to buy in the current environment.

Have a great day!