26 November 2024: Badenoch is driving business anger over the Budget

Kemi Badenoch and Rachel Reeves both made appearances at the Confederation of British Industry’s annual conference yesterday, and their message for British business was interesting, given that they both supposedly want the same thing; to inject sustainable growth and employment into the UK economy.

Reeves went first and was unsurprisingly unapologetic about the measures she introduced in last month’s budget that have caused significant upset within the CBI.

She acknowledged that the increases in taxation that have been laid squarely at the door of British business were unpopular, saying that although she has heard the complaints, she has not heard any suggestion of any alternatives.

She went on to say that her Budget was a one-off, designed to wipe the slate clean following the mess she and her Labour Party colleagues inherited. It can only be hoped that now she will stop the blame game and get on with the job.

She promised that this was her one opportunity to get the county’s finances on an even keel, and that she would not return for more funding during the term of this Parliament.

The new leader of the Conservative Party acknowledged that the Party that she now runs made a mess of its last few years in power, and accepted that it will need to re-earn the trust of the British people.

Although she criticized the implementation of around forty billion pounds of additional taxation, the majority of which will be borne by business, she did not undertake to reverse them should she have the chance to enter 10 Downing Street in five years.

It was seen as a “Mea culpa” moment for both Badenoch and her Party since she was Business Secretary when the previous Government “lost its way”.

In her first major speech since succeeding Rishi Sunak, Ms Badenoch said she was not surprised at how many bosses flocked to meet Sir Keir Starmer and Rachel Reeves before the general election.

“I know it is because you thought that we didn’t understand what your needs and concerns were, and you knew we were going to lose,” she told business leaders.

Looking to capitalize on anger at Labour, with many bosses feeling betrayed after the party’s pre-election charm offensive, Badenoch said: “Every big business started as a small business, and that is why I am so concerned that the burden on them is still increasing, with taxes – corporation tax, employers National Insurance and new regulations.

She found it easier, just as Reeves has found it more difficult to be in Opposition than to be in Government when the burden of implementing can make you unpopular while in opposition there is rarely a wrong decision and even if there is, the consequences are minimal and forgotten within a week, particularly so early in a Parliament.

The Pound bounced back strongly at the start of the week and outperformed its major peers after facing a sharp sell-off on Friday. Sterling declined on Friday after Retail Sales contracted at a faster-than-expected pace in October and the flash S&P Global/CIPS Composite Purchasing Managers’ Index (PMI) for November came in below the 50.0 threshold for the first time since October 2023.

It rallied to a high of 1.2613 and closed at 1.2567.

The nomination of Scott Bessent as Treasury Secretary has been welcomed on Wall Street but has been less than vigorously approved on Capitol Hill.

Senator Elizabeth Warren has almost made a career in the past six years criticizing the actions of Fed Chairman, Jerome Powell, but it seems that her criticism is veiled in a grudging appreciation of the difficulties associated with leading the fight against inflation while still promoting growth and employment.

Last summer, Warren wrote to Powell with an eye on a report in The Wall Street Journal indicating the Central Bank Chief is advocating cutting the proposed increase in capital requirements for the U.S.’s biggest banks in half. Further, Warren wrote, that the report alleges JPMorgan Chase CEO Jamie Dimon and other big-bank executives “lobbied Powell extensively.”

At the time, Warren labelled the report a “highly disturbing turn of events.”

However, it now seems that although she remains critical of the Fed’s performance over the past eighteen months, she also feels protective of its independence, warning the incoming Treasury Secretary “not to meddle with the Federal Reserve.”

It would be a serious error for the Trump Administration to interfere with the Fed’s Independence, as Bessent has suggested, Warren said in a statement yesterday.

While not explicitly saying that she would oppose his nomination, Warren called Bessent a “steward of wealthy investors.”

Bessent, a billionaire hedge fund manager and former Democratic donor, has floated the idea of a “shadow Fed chair,” while Trump has expressed interest in weighing in on the central bank’s rate decisions.

The initial market reaction suggests that the choice of Bessent in this crucial role is seen by financial market participants as an anchor of stability and responsibility in the Trump cabinet.

Markets could start to see that the risks of higher inflation and interest rates are implicit constraints on the Trump policy agenda, with the eventual policy outcomes potentially less inflationary than some investors previously feared.

While further volatility is not ruled out, US Treasury yields may fall in the year ahead, following the 65-basis-point rise over the past two months.

The minutes of the latest FOMC meeting will be published later today, a day early due to the Thanksgiving holiday on Thursday.

Investors will closely examine the release of minutes from the November FOMC meeting. Analysts are particularly interested in the balance of views among Fed officials about the risks of higher inflation versus labour market stability.

This week’s data could shape expectations for inflation, growth, and monetary policy as the Federal Reserve inches closer to its December meeting.

The dollar index lost a little ground yesterday as short-term traders took profits following the Greenback’s rally last week. The index fell to a low of 106.58 and closed at 106.89.

Donald Trump’s second attempt to “make America Great again” is creating significant volatility in Europe.

The Euro has lost close to 5% of its value, while the threatened imposition of tariffs on U.S. imports of European goods is sending shock waves through Eurozone manufacturing.

Although the proposed measures are primarily aimed at China, the effect is likely to be more strongly felt in Brussels than in Beijing, since the European Union has few means with which to either protect itself or hit back at the U.S.

Business Sentiment in Germany was already “on its knees” before yesterday’s publication of the IFO index for November. All three of the major categories, Business Climate, Current Assessment, and Expectations were lower this month than last when they were already showing significant weakness.

Friday’s release of PMIs made painful reading, with the composite index falling to 48.1` from 50 in October. The November PMI is another wake-up call for Eurozone policymakers that the economy continues to show signs of weakness.

New business is weakening again for both manufacturing and services, with export orders being down sharply as the Eurozone economy battles weak demand from abroad.

Hawkish members of the ECB rate-setting Governing Council have accepted that the Central Bank needs to significantly loosen monetary policy over the next few months, although they are concerned that rates may be cut too quickly given their remaining concerns about inflation which has begun to tick back up.

Governing Council members like Isabel Schnabel and Robert Holzmann will accept another twenty-five-basis point cut in December but are likely to vote against a fifty-point cut despite the disappointing data released in the past few days.

European Central Bank Chief Economist Philip Lane stated on Monday that consumer confidence across the euro area has been “subdued” since the start of the war in Ukraine and noted that the bank’s meeting-by-meeting approach to monetary policy is still crucial to navigating potential geopolitical and economic uncertainties.

“Remaining open-minded about the speed and scale of adjustments is a valuable strategy across various environments, as different situations may necessitate distinct approaches,” Lane said in the speech at the Bank of England Watchers’ Conference, ahead of the ECB’s policy meeting next month.

Central Bank of Ireland Governor Gabriel Makhlouf said yesterday that the latest data makes him “confident of reaching our 2% inflation target during 2025.” This is something of an understatement and perfectly reflects the continued concerns over inflation when the region is “staring down the barrel” of a long and painful recession.

The Euro managed to halt its run of losses yesterday as the market took time to reflect on recent events. It rallied to a high of 1.0530 but still looked vulnerable as it closed at 1.0492.

Have a great day!