12 December 2024: Reeves bleats about Whitehall spending

The Chancellor has been warned that the business environment in the UK is “extremely challenging” with firms facing uncertainty about how they can be expected to invest with the added burden of increased National Insurance Contributions hanging over them.

The Business Council of the British Chambers of Commerce gathers every quarter to survey the business horizon. Rachel Reeves attended the latest meeting and conducted an informal poll of nineteen executives from some of the country’s biggest companies, and only three expected conditions to improve over the next year.

While Keir Starmer has refused to confirm that there will not be a similar budget in the future, Reeves told the heads of firms like Aviva, DP World, and SSE that there would be no future repeat.

That is a brave call given the uncertainties in the global economy and the current lack of growth in the UK that will put pressure on the Treasury to either cut services or increase borrowing since the expected increase in tax revenue may not materialize.

Business leaders are concerned about changes to worker rights, which are likely to cost close to three billion pounds.

The headwinds that have been created since the Labour Party came into office have severely dampened the appetite of businesses to invest since survival has now become a major concern.

Since Reeves took office, she and several of her colleagues have taken every opportunity to blame the previous Government for the mess they inherited. However, a considerable proportion of the “black hole”, the size of which is disputed by the Shadow Cabinet, has been created by the inflation-busting pay increases given to public service workers like junior doctors, nurses, train drivers and local government employees.

It is understood that the latest pay review has concluded that wage increases for 2025 for the same groups of workers need to be capped at 2.8% and there is already disquiet among that group who want their wages to increase in line with the private sector.

Several issues currently exist that are not in any way connected with the Conservative Government. An example is the imposition of inheritance tax on farmers. Major protests were held in many UK Towns and Cities yesterday as farmers threatened to strike over what they feel could sound the death knell of family-owned farms in the UK.

Next week’s meeting of the Bank of England’s Monetary Policy Committee, will set the tone for the first quarter of 2025 as Andrew Bailey and his colleagues remain concerned about further cuts in interest rates, inflaming inflation which is not falling as fast as had been previously hoped.

The final push to ensure inflation meets the Bank’s target of 2% is proving more difficult than expected. Several members of the MPC want to see the effect of the rise in employer National Insurance contributions before committing to further loosening monetary policy.

The market is beginning to lose liquidity as traders close their books for the year. Sterling lost ground, falling to a low of 1.2713 yesterday, while resistance around 1.2780 attracts sellers. It eventually closed at 1.2746.

The latest inflation figures were published yesterday, and price rises in November came in exactly as the market had predicted.

Headline inflation rose to 2.7% while the core was unchanged at 3.3%. It is unclear whether the FOMC will see the data as sufficient for rates to be cut at their meeting next week.

While members’ comments have been fairly neutral recently, saying that they do not feel the need to loosen monetary policy while the economy, in particular job creation, is very strong, market analysts and commentators feel that Jerome Powell and his colleagues may want to keep the momentum that a rate cut could provide.

Some Fed Governors have voiced their concerns recently about the effect of the imposition of tariffs of as much as 60% in imports of finished goods, particularly EVs from China, while both Mexico and Canada have a similar threat hanging over them.

It is unclear just how serious President-Elect Trump is about the size of tariffs since he has recently outlined what America’s biggest trading partners need to do to avoid sanctions. However, he has neither repeated nor confirmed that he will “tariff the hell” out of China on day one of his return to the White House.

By and Large, the Presidents of the Regional Federal Reserves have been supportive of a gradual loosening of monetary policy, but since the blackout on further comment prior to next week’s meeting is now in force, the outcome of next week’s meeting is still unclear.

While CPI is still in the “ballpark” of Fed expectation, Personal Consumption Expenditures for November are not due to be published until December 20th, well after the FOMC meeting.

Jerome Powell favours this gauge of inflation since it includes data on housing expenses, including rental costs, which have been a major component of the recent “stickiness” of inflation.

The dollar index is trading in a generally narrow range as the year-end approaches. Yesterday, it climbed to a high of 106.81 but, as has been the case in recent days, was unable to consolidate at that level and fell back to close at 106.65.

Producer price data for November is due for publication today. This may provide the market with some insight into the future level of inflation. “Factory gate” prices are expected to have risen by 2.6% following a rise of 2.4% in October, while core prices fell month on month but climbed to 3.2% year-on-year after rising by 3.1% in October.

Jobless claims which are also due for release today are expected to have moderated slightly but remain close to the 220k level.

A rate cut by the ECB today is just about as certain as anything can be in the current market.

However, the size of the cut is still subject to some speculation. A twenty-five-point cut will likely be agreed upon since there is some disagreement about the amount of stimulation the economy needs.

However, there have been some comments in the last week about some Governing Council members wanting to make a “statement” cut of fifty points to set the economy on a stronger footing going into 2025.

Philip Lane, the Bank’s Chief Economist, and one of the market’s trusted voices, believes that inflation will not fall consistently to its 2% target until the third quarter of next year.

There are two schools of thought regarding the pace of rate cuts. On one hand, the more dovish view is that there will be a cut at each meeting in the first half of the year, while the more conservative view is that there is “only” one cut per quarter.

Isabel Schnabel, the other “trusted voice” believes that the European Central Bank should ease policy only gradually, and cutting rates to a level that starts to stimulate growth may not be appropriate.

Given the inflation outlook, she believes that rates can gradually move toward neutral if the incoming data continue to confirm the baseline. The neutral rate is subject to some conjecture since it is the rate at which the economy is neither restricted nor stimulated, although it is commonly believed to be around 2.5%.

ECB President, Christine Lagarde has warned against the market “getting ahead of itself and expecting a rate cut at every meeting, since there are the twin issues of inflation turning around as the global situation deteriorates further, while the Central Bank does not want to see inflation fall to below the 2% target and remain there.

There is little investor interest in buying the single currency even at the current level which may be considered “cheap”.

Yesterday it fell to a low of 1.0480 and closed at 1.0492. Currently, it seems to be “hemmed in” by commercial buyers at 1.0480 while sell orders have been placed close to 1.580.

The political situation in both Germany and France appears to have quietened down somewhat as rival factions in both countries plan their next move.

The situation in France is more volatile since the country awaits the appointment of a new Prime Minister while Members of Parliament from both the right and left lie in wait to create more discord.

Have a great day!