15 October 2024: Starmer vows to unleash “shock and Awe”

While the Prime Minister promised to unleash “shock and awe” to promote economic growth, it was rumoured that his Chancellor was considering increasing employers’ national insurance contributions in her budget, which she will present to Parliament in a little over two weeks.

In a fresh blow for businesses, Rachel Reeves claimed increasing the levy on employers was not ruled out in her party’s election manifesto, yet leading economists at the Institute for Fiscal Studies (IFS) think-tank warned that hiking employer NI would be a ‘straightforward breach of a manifesto commitment.’

Speaking at the Government’s investment summit yesterday, Reeves told an invited audience that she was really clear in her manifesto commitment not to raise key taxes paid by working people. Businesses would benefit from a freeze in the rate of corporation tax at 25%, which is the lowest in the G7.

Business leaders are already calling this a “tax on jobs,” which will lead them to freeze pay or cut jobs since the economy’s current growth rate is insufficient to sustain a greater level of employee costs.

In response to a comment by the former head of Google in the UK, Eric Schmidt, in which he said that he was “shocked” that the Government was prioritizing growth, Sir Keir Starmer told him that “it is time to upgrade the regulatory regime” as he pledged to “rip up” bureaucracy.

He added, “We will march through the institutions and make sure that every regulator in this country, especially our economic and competition regulators, take growth as seriously as this room does.”

The Government has released the first edition of its Industrial Strategy, aimed at driving economic growth while delivering a net-zero transition. Schmidt commented that a net-zero policy would be impossible to achieve without some stringent regulation.

Later today, the latest figures for employment will be published. It is predicted that the claimant count will be 20k, down from 23k in August.

Meanwhile, wages are expected to have dipped below 5%.

This will be encouraging for the Bank of England, which is considering another cut in rates at its next meeting,

The Monetary Policy Committee’s most dovish member, Swati Dhingra, spoke yesterday of the exceptional circumstances for monetary policy that were created by the Pandemic, which, she believes, are still influencing the economy.

In a presentation to a conference to mark the 90th anniversary of the Reserve Bank of India, she avoided any reference to her voting intentions on November 7th.

The pound fell marginally yesterday in quiet trading but remanded above its support level at 1.3000. It reached a low of 1.3030 and closed at 1.3059.

It seems that the FOMC will be in the mood to review the effect of its jumbo rate increase when it meets a day later than usual due to the Presidential, which is taking place on November 5th.

Another fifty-point cut in rates is not the first choice of several members of the committee.

There are rumours that the size of the cut at the previous meeting was influenced by the fact that members had wanted to cut earlier but did not have access to the July employment report, which they would have likely reacted to by cutting rates by twenty-five basis points.

Neel Kashkari, the President of the Minneapolis Fed, is not a voting member of the FOMC in 2024. Nonetheless, he remains an influential voice on monetary policy.

He spoke yesterday of his view that the FOMC will steadily loosen monetary policy over the next eighteen months. This echoes the sentiments of Chicago Fed President Austen Goolsbee, who believes that the Fed is aiming for a neutral policy which is neither inflation nor growth-biased.

Kashkari went on to affirm the Fed’s commitment to data dependency and his belief that his colleagues have similar views about falling inflation and maintaining healthy employment growth.

He warned that US competitiveness is robust but cannot be assumed, and a reduction in labour demand will lead to increased unemployment.

On future development in the market, the FOMC veteran couldn’t resist a dig at the cryptocurrency market by telling reporters that after twelve years, Bitcoin remains worthless. He does, however, see a future for artificial intelligence in many areas of the economy within two years.

On Tuesday, Federal Reserve Vice Chair Philip Jefferson said the U.S. Central Bank’s half-percentage-point interest-rate cut last month was aimed at “keeping the labour market strong even as inflation continues to ease.”

“The FOMC has gained greater confidence that inflation is moving sustainably toward our 2% goal,” Jefferson said, “To maintain the strength of the labour market, my FOMC colleagues and I recalibrated our policy stance last month.”

Jamie Dimon, the CEO of JPMorgan Chase, has been a harbinger of doom for the U.S. economy for most of the past year and even as the Fed has embarked on a cycle of rate cuts, he is still concerned that a recession is “just around the corner.”

“The US economy has already been reeling from severe fears of an impending recession, along with fluctuating inflation reports. And now, with the extreme uncertainty surrounding the upcoming US elections, things are becoming more complicated as of this moment”, according to Dimon.

There is little doubt that the first week of November will see an increase in volatility, with the October employment report, an FOMC meeting and the election all happening before November 8th.

Unusually, the October Employment Report is expected to be published on November 1st. This will increase the number of estimates, which will make it even harder than usual to predict.

The dollar index is struggling to make ground as it closes on the congestion it faced in early August when its period of sustained weakness began, as the markets expected that the Fed would cut rates more rapidly than the ECB and Bank of England.

Yesterday, the index reached a high of 103.36 and closed at 103.20.

The focus of the ECB appears to have rotated through 180 degrees recently, as its expectations for the pace of deflation have grown.

The Governing Council is now expected to cut its key interest rate for the second straight meeting, and the third time overall in a move which, following the last meeting, was considered as having no chance.

Any thoughts of one cut per quarter policy have seemingly been abandoned, as even the most hawkish of its members now see that inflation has been defeated or is at least on its last legs.

There have been several warnings from Eurozone Banks, Think Tanks and Government Ministries that the economy is in a dire situation, but typically the ECB has delayed by one or two meetings to act and is now playing catch up.

It is interesting to note that in his report to the European Commission, former ECB President Mario Draghi made no mention of the makeup of the Governing Council since he is known to be in favour of a significantly slimmed-down version.

Cracks are finally appearing in the eurozone’s labour market after years of unexpected resilience, spurring the European Central Bank to lower interest rates more speedily.

Despite still record-low joblessness following the inflation shock and a struggling economy, policymakers see signs of a shift that’s helped persuade them to back another reduction in borrowing costs this week.

While the focus has been on German economic woes, it seems that the new French Prime Minister, Michel Barnier, has inherited a situation that is almost as dire.

France is waking up to a harsh reality, its fall from favour in the eyes of global investors is pointing to a long, painful, and uncertain rehabilitation.

A nation whose bonds were historically seen as a proxy for German bonds, the region’s safest asset, now finds itself recast as a poster child for fiscal jeopardy. Its debt yields are now aligned with Spain and increasingly close to those of Italy.

The French government unveiled a budget for next year that aims to deliver a €60.6 billion remedy for its creaking public finances and rebuild investor confidence, even as it risks eviction by a hostile parliament.

Spending cuts will account for just over two-thirds of what Finance Minister Antoine Armand called an unheard-of fiscal effort, with the rest coming from higher taxes on businesses, the wealthy and energy.

France’s budget deficit, expected at 6% of GDP by end-2024, is among the largest in the eurozone, with the budget expected to trim this to 5% by the end of 2025, supported by modest growth in GDP.

The euro continues to lose ground at a moderate pace, which may be an even greater concern than a rapid decline since it shows a loss of investor confidence.

Yesterday it fell to a low of 1.0882 and closed at 1.0908. The common currency may see its decline accelerate on a break of support at 1.0880.

Have a great day!