1 November 2024: The ramifications of the Budget are widespread

Market analysts have now had time to pore over Rachel Reeves’ Budget and the verdict is that it was unnecessarily tough on business, with the burden of more than half of the forty billion pounds in additional tax revenue that will be raised, falling on businesses.

The trickle-down effect will eventually mean that, even though employees’ national insurance contributions were left unchanged, that sector of the economy will suffer through lower pay increases.

Farmers were also “outraged over changes to inheritance tax that will see farms having to be broken up into smaller units and parts sold off to pay for additional duties when family-owned businesses suffer a death.

The financial markets were sanguine regarding the changes, although interest rates on five-year government borrowings rose by approximately twenty-five basis points in the wake of an increase in the overall level of debt.

Fixed-rate mortgages are priced using this as a basis, so in the short term, borrowers will be asked to pay more when fixing their mortgage costs.

Although there is no statistical data to back it up, there is anecdotal evidence that buyers have pulled out of house purchases while they evaluate the new stamp duty costs.

Reeves and her boss, Sir Keir Starmer, were unapologetic about the scale of tax increases, although Reeves was quoted as saying that these are not the type of measures that she would like to deliver again.

She did, however, receive some encouragement from the IMF, which commented that her £40bn of tax rises would boost growth “sustainably”.

In a rare intervention, the Washington-based IMF backed her increase in investment and extra spending to ease the financial pressure on public services and boost growth.

A spokesperson for the fund said new budget rules showed the government was committed to bringing down the UK’s debts over the longer term.

“We support the envisaged reduction in the deficit over the medium term, including by sustainably raising revenue,” they said, adding that the IMF approved of the government’s “focus on boosting growth through a needed increase in public investment while addressing urgent pressures on public services”.

Some economists believe that the measures will not foster the boost in investment that was promised by the Chancellor. Better-funded public services will only go so far, especially in the NHS, which is considered by many as a “money pit”, which needs a considerable and significant overhaul.

The pound is more driven, at least in the short-term, by monetary rather than fiscal policy, so attention will now turn to next week’s meeting of the Bank of England’s Monetary Policy Committee.

With a rate cut now considered likely, it fell to a low of 1.2843 yesterday but recovered to close at 1.2899.

The U.S. economy is still providing mixed signals as the race to replace President Biden enters its final weekend.

It has been a considerable time since the Presidential Election had a clear favourite, and this time round it is no different.

In terms of the popular vote, the result could go either way, but the electoral college vote which will determine whether it is Donald Trump who returns to the White House, or the country gets its first female president in Kamala Harris will come down to the narrowest of margins just as it did in 2019.

It is unclear just how much complaining Trump will do should he lose again, but the fact that he has already commented that the entire system is rigged against him gives a prime indication.

It is to be hoped that if Harris is victorious, it will draw a veil over the type of innuendo-based populist politics that have endured since Trump decided to go into politics in the first place.

Meanwhile, the financial market has been reacting to the economic data relative to employment and prices that will allow the Federal Reserve to decide on whether a rate cut is deemed necessary at the meeting of the FOMC, which takes place next Wednesday and Thursday.

It is to be hoped that the New President has been declared by then.

There was a significant fall in the number of job cuts in October. The Challenger data showed that job cuts fell to 59.5k from 72.8k in September, while weekly jobless claims fell to their lowest level in almost six months.

That news was sufficient to make traders consider a rate cut by the FOMC. However, Personal Consumption Expenditures, Jerome Powell’s favoured measure of inflation due to its broader base, was unchanged in September at 2.7%. That led to a pause for thought, leaving the dollar close to where it had been all week.

The October Employment report is due to be published later today, with the market in even more of a dilemma than usual in deciding what the headline number is likely to be. The range of predictions is wider than normal, given the shock provided by the September data.

The predictions range from just under 100k up to 220k, which shows how difficult the data is to predict. It is made harder this month, since it is being published, unusually, on the first day of the new month.

This means that there will be even more estimates than usual provided, which will be adjusted next month. The dollar lost ground yesterday as the market saw the possibility of a rate cut next week, but it will be today’s data which drives market sentiment.

The index fell to a low of 103.82 and closed at 103.89 perilously close to its first line of support.

ECB Board Member Isabel Schnabel spoke yesterday of her view that the Eurozone economy is not in such desperate need of stimulation as the market believes.

Schnabel pushed back against calls for ultra-easy monetary policy, arguing that inflation was unlikely to ease below its 2% target, so gradual rate cuts remained appropriate.

Policy doves, mostly from the Eurozone’s south, raised concern last week that inflation could fall too far, and this may require the ECB to cut rates to below the so-called ‘neutral level’, where it neither stimulates nor holds back economic growth.

Conservatives, still holding the majority on the 26-member Governing Council, quickly pushed back and Schnabel, an outspoken policy hawk, added her voice to their chorus of resistance.

“The risk of meaningful and persistent undershooting of the inflation target remains small,” Schnabel said in a presentation for a speech in Frankfurt. “Projected growth in 2025 is close to potential, (so there is) no need to go below neutral.”

The Central Bank Head in Schnabel’s home state of Germany, who has more reason than most to be in favour of further rate cuts, voiced his support for his countrywoman.

Joachim Nagel believes that the ECB can be cautious about any further loosening of Monetary Policy since inflation is still far from being beaten.

Euro area annual inflation is expected to reach 2 per cent in October 2024, up from 1.7 per cent in September, according to a flash estimate released yesterday by Eurostat.

The services sector recorded the highest annual inflation rate at 3.9 per cent in October, maintaining its level from September. Services have been a constant thorn in the side of policy doves for most of the past two quarters.

Food, alcohol, and tobacco saw an annual inflation rate of 2.9 per cent, up from 2.4 per cent in September. Energy prices, though still in decline, recorded a slower contraction in October, down 4.6 per cent compared to a 6.1 per cent decrease in the previous month.

The next meeting of the ECB’s rate-setting Governing Council is scheduled for December 12th, by which time the market should be in a better position to judge what action it will take.

Next week is likely to allow a period of reflection in European Markets as the focus will switch heavily towards the U.S. However, should Donald Trump be successful in winning back the Presidency, the single currency may see a period of weakness as he firms up plans to introduce tariffs on imports of manufactured goods from several countries, including those of the Eurozone.

The Euro rallied yesterday as the data as well as various comments made a rate cut in December a little less likely.

It climbed to a high of 1.8888 and closed at 1.0883.

Have a great day!