21 November 2023: Speculation starts over personal tax cuts

There is growing speculation at Westminster that Jeremy Hunt has bowed to pressure from his colleagues and will announce cuts to personal taxation when he delivers his Autumn Statement tomorrow.

The feeling that he is going to not only cut corporation tax and increase the inheritance tax threshold, but also raising the level at which the minimum income tax band begins and even possibly cutting national insurance contributions.

Since Rishi Sunak unceremoniously dismissed Suella Braverman, his outspoken Home Secretary, he seems to have decided to go all out in preparing for the General Election, appearing to be less concerned about his critics and abandoning some of his principles to allow his Party to at least compete.

It may all be too little too late as the Labour Party maintains a healthy twenty-five-point lead in the polls, which is only receiving a boost from the ongoing Covid enquiry in which senior Government figures are receiving severe criticism.

While it is easy to say that the Conservative Party was “unfortunate” to be in power at the time of the Pandemic, they are being shown as both unable to oversee the basic requirements correctly and had an air of superiority when dealing with science.

The Government’s Chief Medical Officer at the time of the Pandemic said that he was ignored over the introduction of the “eat out to help out” scheme and that, to him, it was obvious that it would contribute to the spread of the virus.

Sunak has been taking credit on behalf of the Government for the fall in the headline rate of inflation. He pledged that inflation would be halved within his first year in office, but it is hard to point to any policy that he has introduced that made any significant contribution.

It is likely that any tax cuts announced tomorrow will be more “symbolic” and are unlikely to make a material difference to the lives of people generally.

Hunt will keep the triple lock on the state pension, which means that next April pensioners will get a significant increase that is likely to be twice the rate of inflation.

It would be seen as a betrayal of some of his Party’s most loyal supporters to abandon the policy at this point.

The pound continues to make ground against the dollar, which is still driven by the prospect of rate cuts coming sooner than the FOMC predicts.

Yesterday it rose to a high of 1.2517 and closed at 1.2506. There are plenty of points of resistance to overcome before a path to the 1.2750 level is challenged.

The level of U.S. Government debt has now reached $33.9 trillion and is continuing to rise almost unabated. These numbers would be untenable without the cooperation of the Chinese Government, which is the country’s largest creditor by far.

The two superpowers are locked in a love-hate relationship where both realize that they can’t live without the other.

It is a factor of globalization that no other nation can come close to competing with China’s level of industrial and manufacturing production.

The next two major exporting economies are Japan and Germany, and while Japan is now showing healthy growth, the German economy is contracting and is close to recession. As for imports, the U.S., having “exported” its manufacturing capability under several Presidents, has become the only major market for Chinese goods.

China has also managed to significantly close the quality gap between its products and those produced by Japan and Germany. Furthermore, China is now well positioned to challenge the dominance of South Korea in mobile communications.

The meeting between President Biden and Chinese Premier, Xi Jinping last week saw a slight shift in the relationship between the two nations as Chinese Growth appears to be plateauing while the U.S. appears to be on the verge of a period of resilience, although next year’s election may be a cloud that for now is a distant distraction.

Wall Street is concerned that Jerome Powell is encouraging his colleagues on the FOMC to have too much to say about the economy in general, and the future path of interest rates.

Several bank economists believe that the message is being “watered down” although the comments are generally supportive of Powell’s stance.

There is an unwillingness by traders and investors to commit to any significant positions ahead of this week’s holiday, which will see liquidity drop considerably.

The dollar index has lost more ground but so far isn’t showing any reason for concern since it remains in its recent trend. It fell to a low of 103.18 yesterday and closed at 103.25.

There is some support around this level, but the major line of support is situated at 101.80.

A test of this level would need to coincide with some major change. For example, a comment from the Fed that rates have peaked, and the next move will be a cut.

So far, such a comment would be highly unusual, and would require the November employment numbers to see less than 100k new jobs created, or core inflation to fall below 3%

The major players on the Governing Council of the European Central Bank may all be “singing from the same hymn sheet”, but their voices appear to mask a growing concern about the state of the Eurozone economy.

Banque de France Governor, Francois Villeroy de Galhau, agreed with ECB President Christine Lagarde in comments made yesterday that interest rates in the region have plateaued and will remain at an elevated level for “several quarters”.

He went on to say that any talk of rate cuts is premature, given the current level of inflation. The Central Bank appears unable to deal with its economy without discussing inflation and growth individually, or at least acknowledging that the two are mutually connected.

There appears to also be an undue level of importance attached to the eurozone wide employment data, which has been questioned as to its veracity on several occasions. The view of the ECB is that there cannot be any systemic issue if unemployment continues to fall.

Unfortunately, the Eurozone is not the U.S., and the dynamics of the economy are vastly different.

It may be that ECB officials want to convince the market that they are serious about the threat posed by inflation, but after ten consecutive rate hikes when rates have gone from zero to 4.50% it is certain that the market has got the message.

It is the definitive view that rates will remain at their current level for some time that is concerning investors.

If the economy “falls off a cliff” which is not an unreasonable assumption given the current data and the lack of growth that that has taken place so far this year, will the Central Bank, or more especially Christine Lagarde be brave enough to perform a volte-face, and if she does, will she receive the same level of support.

The recent strength shown by the Euro will help the fight against inflation but will also reduce the competitiveness of Eurozone exports.

That is another reason here little concern is being shown about the dollar’s recent weakness, as it provides a degree of comfort to U.S. exporters who are competing with Eurozone companies for market share.

Yesterday the single currency rose again, this time to a high of 1.0952, closing at 1.0941. The path between its current level and 1.1020 where major resistance is situated is strewn with several failed attempts to push higher.

Have a great day!