21 August 2024: Reeves reveals plans for her Budget

The Government has been warned that returning power to the unions will stifle growth and cause industrial relations to deteriorate.

The Prime Minister has been warned that plans to force firms’ management to negotiate witty workers even if a minority of them are union members.

This is a reversal of a decades-old principle established under Margaret Thatcher when the power of the unions was drastically reduced.

The issue of union domination of the government has returned to the fore as a slew of wage demands that Rishi Sunak’s ministers had resisted for months and, in some cases, years returned to the fore.

It seems that nurses, junior doctors, teachers and train drivers will be exempt from the “belt-tightening” that is being threatened by Rachel Reeves in her first Budget as Chancellor of the Exchequer which he will deliver to MPs in October.

Reeves is determined to keep her promise to get the economy back on an “even keel” after what she called years of fantasy accounting, where spending plans weren’t costed in advance.

Despite stronger-than-expected growth figures for the year’s first half, Reeves is still expected to raise taxes and cut spending. One area she is investigating is increasing rents for social housing to provide councils with the necessary funding to meet new house-building targets.

Inheritance and capital gains tax are set to increase as she will keep her promise to keep income tax, national insurance and VAT at their current levels.

One area that has proved to be contentious for new Labour MPs is the continuation of the two-child rule for benefit, which is set to continue.

As next week’s bank holiday marks the traditional end of summer, liquidity in the financial markets is set to improve. Changes to monetary policy in at least three G7 economies are expected to drive September.

The Bank of England saw inflation pick up when the latest data was published which may deter members of the MPC from voting for a cut in interest rates.

Jonathan Haskell, who was a hawk on monetary policy, has now left the Committee, and his replacement, Alan Taylor has no record of how he views the relationship between prices and growth, the markets will likely see increased volatility over the next few weeks.

Yesterday, Sterling closed above the 1.30 level versus the dollar for the first time in almost a year. The dollar was driven lower by the prospect of a rate cut by the FOMC at its September meeting.

It reached a high of 1.3052 and closed at 1.3034.

After a summer of speculation about when rather than if the Federal Reserve would cut interest rates, two events this week will sharpen traders’ focus on next month’s Federal Open Market Committee meeting.

There has been a dearth of comment from many members of the committee over the past two months with most sound bites providing little certainty.

The minutes of the latest meeting of the FOMC at which the majority of its members voted to leave interest rates unchanged, will be published later today.

The meeting took place before the release of the July employment report which held a downside surprise that drove market concerns that the economy was headed into a recession.

Those fears have since been contained since the economy exhibited moderately robust growth over the first half of the year, although Q2 was not as strong as Q1.

Jerome Powell will make the keynote speech at the Jackson Hole Symposium at which he is the host, on Friday. Despite the many theories that have been provided over the past six months it seems that he will be close to declaring that the economy has either achieved or is set to achieve a soft landing where job creation is “satisfactory”, and inflation is close to its 2% target.

He will stop short of confirming a rate cut next month, particularly since a cut when the economy is showing growth would be a historic first.

Powell will choose his words carefully given the effect the possibility of a rate cut has had on the dollar recently.

The dollar index has lost 5% of its value over the past two months as rate convergence has continued.

Yesterday, it fell to its lowest level this year, reaching 101.36 and closing at 101.37.

With the next release of employment data not happening until 6th September, intense speculation will continue about what, if any, the Fed will take.

If Powell retains his “hawkish bias” on Friday, the dollar may recover, otherwise, it is in line for a period of sustained weakness.

The chances of a “follow-up” rate cut by the ECB at its September meeting are fading with every new piece of data that is published.

Yesterday’s release of inflation data for the entire Eurozone showed that both the headline and core rates remained unchanged at 2.9% year-on-year, even though inflation fell by 0.2% month-on-month.

This is unlikely to drive the Governing Council to do anything but leave rates unchanged at its meeting on September 26th. Unusually the ECB meeting will be the last of the major G7 monetary policy meetings to take place in Q3.

Wage growth in Germany is not abating as the elevated level of interest rates does not deter employers from acceding to the demands of workers.

The spiral of wages over prices continues as secondary inflation caused by businesses having to raise prices to deal with increased wages continues.

While this is happening across the entire economy, it is particularly prevalent in the services sector.

In its latest report on the economy, the Bundesbank commented that it does not believe that the German economy will fall into recession in the third quarter of the year.

After contracting by 0.1% in the second quarter, following a 0.2% expansion in Q1, GDP should improve slightly in Q3 according to the German Central Bank.

The Bundesbank believes that consumer spending will rise over the current quarter with services spending also improving.

Consumer spending is still “restrained” while the savings rate is still high.

Ongoing weaknesses in both industrial and construction output are still a concern but the situation is not expected to worsen unless there is another energy crisis which is not predicted to happen.

The Euro can now be considered to have broken the 1.10 barrier conclusively, although traders are still acting with caution reacting nervously to any slowing of its advance.

Yesterday, the common currency rose to its highest level this year, reaching 1.1130 and closing at 1.1129.

Have a great day!