12 October 2023: Party conferences over, time to concentrate on the Autumn statement

Now that the Party Conference “season” is at an end the aims of the two main political parties will be geared towards the General Election that must be held by the end of next year.

Rishi Sunak will begin by considering the optimum time to dissolve Parliament in discussion with his senior advisors. The number of opportunities to have a significant effect on voters’ opinions are diminishing rapidly.

The Chancellor of the Exchequer, Jeremy Hunt, will deliver his Autumn Statement to Parliament on 22nd November, and its content will be pored over for tell-tale signs of “sweeteners” that will place the Conservatives in a good light with the electorate.

The most obvious of those will be around taxation, both direct and indirect. While Hunt has already said that it is too soon to be considering cutting taxes, were he to reconsider that would increase speculation that the election will take place sooner rather than later.

Any positives that are to be gleaned will need time to work their way into the voter’s psyche for them to influence their voting intentions.

The Labour Party has said that it intends to fight the election with the economy as its main line of attack. It will be difficult for Sunak to defend the Government’s record over the term of this Parliament and using the excuses of Brexit and the Pandemic are unlikely to influence voters.

It is more likely that they will highlight the dithering that Labour used when trying to create a salient attitude to Brexit as an indicator of their inability to provide clear policies that will stand the test of the inevitable pitfalls that “come with the territory”.

Furthermore, while the Government entered the realm of uncharted territory when dealing with Covid-19, the performance of then Health Secretary Nick Hancock and Prime Minister Boris Johnson left a lot to be desired.

If the election is to be held closer to the deadline, Hunt will still have one more Spring Budget to affect the voters. Should there be a more economic recovery related statement made next month, it will be as clear an indicator that it is possible to give that the Prime Minister is in no hurry to “go to the people ”.

While there is still a great deal of work being done behind the scenes around Brexit, Particularly around cutting the amount of bureaucracy that is hampering trade, Andrew Bailey believes that overall it has now been a positive move for the economy, although it may be two or three years until all the “wrinkles” have been removed.

Data for manufacturing production will be released later today, and although this sector only makes up 20% of total GDP, it is nonetheless an important indicator. Year-on-year. Manufacturing has been growing at a rate of around 2.5% but in August that is expected to have risen to closer to 3.5% as the “Brexit effect” continues.

The pound is in something of a hiatus currently, global events and the relative strength or otherwise are having a more significant effect than its direct drivers.

Yesterday it continued its recent rally reaching a high of 1.2337. Its daily gains are becoming less significant as it becomes overbought, and it may be close to a short-term peak that is likely to be around 1.2350 unless there are new developments. It closed yesterday at 1.2313.

The minutes of the latest meeting of the Federal Open Market Committee (FOMC) were published late yesterday evening, and they showed that the Committee is facing a difficult decision at its next meeting that takes place in three weeks’ time.

While the entire group agrees on the overall goal of defeating inflation that is seen as the biggest threat to the Fed’s ability to deliver a soft landing for the economy, the methods that are available are creating divisions.

The Chair, Jerome Powell is a hawk and has been since the policy of rate increases began, constantly commenting that the only way to bring inflation down is to constantly tighten monetary policy. It is thought unlikely that he would have voted in favour of the first pause which took place in June, although he may have “mellowed” as interest rates have reached what appears to be a restrictive phase.

However, several of his colleagues, especially those who are the Presidents of the Regional Federal Reserves whose membership of the FOMC is rotational, see things a little differently, as they feel that policy tightening takes time to “work its way into the system” and that rate would be best left unchanged for a period of at least three months.

A prime example of this has been the recent decline in the housing market which is one of the sectors of the economy most affected by rising interest rates.

However, one of the prime responsibilities of the Fed is to create low inflation growth in employment and while job growth is at historical highs with more than two million new jobs being created this year alone, inflation still is an issue.

This conundrum points to a further hike in rates at the November 1st meeting, although fears do exist that when rates go “over the top”, the effect will be almost instantaneous, thus creating a difficult balancing act.

Since it has never happened before, it is hard to say whether one point three trillion dollars in additional savings that were made during the Pandemic was normal, although given that the ability if not the desire to spend was severely curtailed make such numbers plausible.

Furthermore, the significant increase in both demand and the cost of living is likely to see those added savings decrease just as quickly.

Today, the September inflation report will be published. Estimates of both the headline and core are usually fairly accurate since the models that are used are common knowledge. Headline inflation is predicted to have fallen to 3.6% to 3.7% in August, while the core, with more volatile elements stripped out is also expected to have fallen from 4.3% to 4.1%

The worrying data from the Fed’s point of view is that neither rate has fallen month-on-month, which may be a sign that inflation is becoming ingrained in the economy.

It will be interesting to hear FOMC members’ take on the data in the coming weeks.

Treasury Secretary Janet Yellen commented yesterday that she doesn’t see any significant economic effect for the conflict that is currently taking place in Israel and Gaza.

The oil price has remained fairly constant as while turmoil often sees the price rise, Saudi Arabia announced an increase in production that had the opposite effect.

The dollar index fell again yesterday, reaching a low of 105.55 and closing at 105.71. Between 105.60 and 105.30, there is a good degree of support but should the lower level break it may precipitate a more significant fall.

It may be considered “about time” but the ECB announced that it is looking at introducing “structural changes” to not only the method it used to determine growth rates and inflation, but also how it decides the overall rates and targets.

There is little doubt that there has been a fracture that has led to rates possibly being raised more quickly than was strictly necessary due to the concerns of individual members of the Eurozone, while others are more able to cope economically with higher inflation.

It has become more an issue of attitude than economic viability.

Another factor has been the abandoning of the rules around economic stability that took place during the Pandemic which haven’t been replaced.

Italy has a debt to GDP ratio approaching 150% as recently as June, white its budget deficit is 5.3% up from 4.5% in April. These figures are unsustainable and show no sign of coming down any time soon.

The Italian Government recently introduced a “super bonus tax break” on residential property investment. The scheme, which was first considered in 2020, is now expected to total 6% of GDP.

Even Spain which is now considered to have one of the healthier economies in the Eurozone has, for it, a record debt to GDP ratio, close to 115%.

Martins Kazaks, the head of the Latvian Central Bank and one of the more hawkish members of the ECB’s Governing Council spoke yesterday of his view that the Bank should curtail its bond purchase scheme even more rapidly than it is at present.

He sees negligible risk of contagion from the rise in Italy’s borrowing costs which he feels are merely a reflection of its ballooning level of debt. That is the first example for some time of an individual Eurozone member being allowed to remain outside what is considered prudent economic discipline without the ECB considering or even threatening to step in.

That may be the “thin end of the wedge” towards a two, or multi-tier threat to monetary union and kicks and possibility of fiscal union “into the long grass”.

The first stage of the end to the Pandemic Emergency Purchase Programme would be to end the reinvestment of proceeds of maturing bonds. This would doubtless “punish” the more indebted nations which Kazaks clearly feels is both warranted and necessary.

Inflation expectations are still high throughout the Eurozone. The public now believe the continual maturing of the Eurozone will see interest rates “revert to mean” which will see higher rates for those who historically had low rates and vice versa.

The euro continues to gain much against the better judgment of traders and investors. Yesterday, it rose to a high of 1.0634 and closed at 1.0619. In common with other major currencies, it is closing on an inflection point that may be tough to break.

Have a great day!