11 October 2024: Reeves is content with upsetting her backbenchers

The much-vaunted UK Investment Summit is due to be held next week, with the Prime Minister, his Deputy, and the Chancellor of the Exchequer showcasing the many advantages to investors of participating in the opportunities on offer.

The new government has promised several initiatives in the three months it has been in power, but its delivery of those promises is still in its infancy.

The burning question to which investors will want to know the answer before they commit to any long-term project concerns taxation and, in particular, capital gains tax, which is rumoured to be raised to as much as 39% in the budget.

While trying to encourage investors to believe in her ability to “steady the ship” while promoting growth and economic output, Rachel Reeves also has the problem of trying to plug a black hole in the nation’s finances, which depending on who one asks could be anything up to twenty-five billion pounds.

The Chancellor will need to make £25bn of tax rises in the Budget to avoid spending cuts and meet her pledge to borrow only to invest, an Institute for Fiscal Studies report says.

However, she has pledged not to raise corporation and income taxes, as well as VAT and national insurance throughout this parliament.

She has not given the same assurances over capital gains and inheritance taxes, as well as pension levies.

The Treasury is also reportedly looking at changing its five-year forecast rules to allow debt to rise in the final year to allow room for more borrowing for investment.

The Institute for Fiscal Studies says: “The Chancellor has inherited an unenviable public finance situation.

“Taxes are at a historic high and yet debt is high, rising and only barely forecast to decline in five years, while many public services are showing obvious signs of strain.”

To leave the major taxes unchanged and not reduce public spending while reducing government debt is a trick that may be beyond this Cabinet. In other words, something must give.

Reeves has scaled back her plans for green investment from twenty-eight billion over five years to approximately nine billion, but she will need to push her spending plans to the absolute limit under current fiscal rules.

The IFS believes that the budget that will be delivered in three weeks will be the most consequential in fifteen years,

The jury is still out on whether the Bank of England will cut interest rates at its next meeting. Comments from MPC members have indicated that the Committee is split, and the vote will be as close as it was when the first tare cut was agreed.

The pound came close to testing the bottom of its medium-term range yesterday, falling to a low of 1.3022, but it recovered to close at 1.3058.

U.S. inflation fell to its lowest level in three years in September.

Headline inflation fell to 2.4%, although this was above the 2.3% that the market had been expecting. Core inflation, the headline rate with volatile items like energy and foodstuffs removed, rose to 3.3% from 3.2% last month.

This represents the lowest annual rise since February 2021, when prices began to climb, reaching their highest levels in four decades,

This is the last report on the consumer price index to be published before the presidential elections on November 5.

Over the past few years, the rise in fuel and food prices, and those of other products, has eroded the popularity of President Joe Biden and his vice president, the Democratic candidate Kamala Harris, providing Republican Candidate Donald Trump with a measure of support.

The rise in the oil price is expected to spill over into petrol prices, and this is more visible than any price index.

The price data, together with the strong job creation figures published last week, show that the economy is going through a sweet spot, which is close to providing the soft landing that the Federal Reserve has been trying to achieve for more than two years.

Fed chair Jerome Powell began the era of rate cuts with an aggressive half-point reduction in September.

A raft of Fed officials made speeches or provided sound bites regarding monetary policy yesterday.

Raphael Bostic, the President of the Atlanta Fed, would be comfortable with the FOMC skipping a rate cut next month, while John Williams from New York believes that further rate cuts lie ahead as inflation moderates further.

Meanwhile, Chicago’s Austen Goolsbee brushed aside the inflation data to indicate a more balanced economy. He also believes that the Fed’s 2% target for inflation is sacrosanct and should not be the subject of any review.

Federal Reserve Board Governor Lisa Cook stated that it is still “an open question” if the pandemic-era surge of new businesses will continue, adding that the “future is uncertain.”

The pre-pandemic period was a period of declining rates of new business creation, and the pandemic surge itself does appear to be cooling off recently,” Cook noted.

The Pandemic’s effect on not just the U.S. economy but also the developed world is still being felt and will be for some time to come until the monetary policy has reached a level where it is neither supportive nor restrictive and economies do not need stimulation or constraint.

The Dollar index rallied to a high of 103.18 yesterday, its highest since early August, following the inflation report but fell back to close at 102.85.

The report published recently by Mario Draghi on the Eurozone economy is close to being accepted by the European Commission almost by default.

A report released yesterday showed that advances made in recent years by China have the potential to disrupt manufacturing in five major Eurozone economies by close to 3.5% in the coming years.

This will affect large companies operating globally as well as specific sectors like electrical equipment supply, including EVs and chemicals.

European manufacturing firms rely heavily on China for hundreds of “foreign critical inputs,” and in case of a disruption to the Chinese supply chain, this dependence could cause significant turmoil in EU industries.

To highlight this manufacturing conundrum, economists from the National Bank of Belgium, Bank of Italy, Bank of Slovenia, Bank of Spain and European Central Bank examined the implications of China’s role as a crucial supplier of foreign critical inputs to five euro area countries Belgium, France, Italy, Slovenia and Spain.

The European Commission has identified hundreds of such inputs, which include strategic products like microchips, turbine parts, optical equipment and chemical precursors essential to produce pharmaceuticals and batteries for electric vehicles.

Overall, FCIs represented 17% of extra-EU imports, with other notable geopolitical suppliers being Russia and Hong Kong.

Until and unless the EU can structurally change its manufacturing base, the situation is only going to get worse, leaving the entire region open to major disruption should China restrict supply either deliberately or due to some catastrophic event such as was seen during the Pandemic, which originated in China.

Economic struggles are gripping Europe’s powerhouse. Germany’s financial woes are deepening, with the government announcing that it is heading for its second straight year of economic shrinkage.

The latest forecast paints a gloomy picture. Officials now predict the economy will contract by 0.2% in 2024, a stark reversal from their earlier hope of 0.3% growth. This matches what many economists have been saying for months.

If Germany were a corporate business, its lenders would be expressing concern about its viability.

Meanwhile, the European economy is rapidly losing steam, and growth will likely come to a standstill over the winter. The good news is that inflation is now more benign, and that should allow the ECB to step up its pace of interest rate cuts.

The hope for a revival of household consumption on the back of higher real wages should be tempered, as the savings ratio increased for the eighth consecutive quarter from April to June. It now stands at 15.66% of disposable income, against a 25-year average of 13.45%.

The single currency lost more ground yesterday, and the 1.10 level is beginning to look like a distant memory, although any Euro weakness should promote export growth.

It fell to a low of 1.0900 yesterday but rallied a little to close at 1.0931.

Have a great day!