2 September 2024: Reeves may cut support for councils

Yet another rumour was floated last week by the Government as it surreptitiously tries to gauge public opinion for its taxation and spending plans due to be published in the Autumn budget next month.

The latest plan is for the level of support provided to local councils to be cut. This would lead to significant increases in council tax for both individuals and businesses. No further details have yet been leaked, but the plan could see councils cutting local services like leisure amenities, public transport, and libraries.

Labour’s planned hike in the windfall tax on North Sea oil and gas producers will deal a £13 billion blow to the industry, according to analysis by the industry.

Offshore Energies UK (OEUK), which represents the sector, said most investment plans over the next five years would be scrapped if the increase goes ahead, undermining the government’s goal of boosting growth.

The Government has already announced that the headline tax rate will rise from 75% to 78% and there will be cuts to certain tax breaks on top of tax increases.

OEUK have accused the Government of short-termism since the plan will see an interim gain for the Treasury while over the long-term revenue following into the country’s coffers will fall by up to £12 billion.

The MPC will meet on 19th September to vote on a change to monetary policy. Given how close the vote was at the last meeting and the data that has been released recently, the vote is finely balanced.

The rise in inflation last month may well sway members, particularly the more hawkish permanent members, to vote for no change.

Sarah Breedon, who voted for a cut last time, is speaking tomorrow, and even a marginally hawkish outlook may be seized upon by market observers as a sign of a change in her vote.

Sterling lost ground over the second half of last week as the dollar reasserted itself and the market got to grips with the rate cut that is expected to happen this month.

On Friday, it fell to a low of 1.3109 and closed at 1.3127.

Breedon’s speech may well be the highlight of the week since there is no tier-one data due for publication.

The new month is likely to refocus the market’s attention on the prospects for a rate cut.

Although Jerome Powell’s speech at the Fed’s Jackson Hole Symposium a couple of weeks ago set the scene for a rate cut, there are still a couple of hurdles to be cleared, the first of which occurs this Friday with the release of the August employment report.

There are a few “appetizers” due to be provided before the delivery of the “main course.” JOLTS job openings are due to be delivered on Wednesday, with weekly jobless claims, ADP private sector jobs and Challenger job cuts, due on Thursday.

Sandwiched among the employment data will be output data which will also grab the attention of FOMC members, particularly Regional Presidents, who will be keen to see how the economy is performing in their areas.

Friday will see the publication of the “main event” with the market expecting another weak number for headline job gains.

The initial expectation is for around 150k new jobs to have been created, but it is any revision to the July NFP that will grab the most attention. The question is; was the 114k new jobs created in July merely a “blip” of the start of a new trend towards a weakening of the economy?

It is hard to consider an economy that created more than 100k new jobs to be heading for a contraction, but should that be the market’s impression, the size of the proposed rate cut may be called into question.

Jamie Dimon, the CEO of J.P. Morgan, and Wall Street’s unofficial mouthpiece, has speculated that the FOMC may want to show its support for the economy by cutting by fifty basis points, although that would be considered extreme given the level of inflation and the GDP gains over the past two quarters.

It is far more likely that the Fed will want to “keep its powder dry” in case more extreme measures are needed down the line.

The dollar index recovered its poise last week, rising to a high of 101.78 and closing at 101.73.

Today is Labor Day, which officially marks the end of summer. Liquidity and volatility will pick up as G7 central banks “gear up” for monetary policy meetings starting late next week.

The only good news for the Eurozone economy that was delivered last week was a marginal improvement in economic sentiment, which rose from -96-6 to -96 and industrial confidence, which “climbed” to -9.7 from -10.4.

Meanwhile, inflation data from individual members and the Eurozone as a whole all fell, with deflation in Germany reaching the ECB’s 2% target

Even the most rabid hawk on the ECB’s Governing Council must now believe that a rate cut is not only warranted at the meeting which will take place next week, but desperately needed.

The German economy contracted by 0.1% in the second quarter and with data published so far for Q3 pointing towards another contraction, its economy may have slipped back into recession.

Eurozone inflation is falling as predicted, easing the risk that further rate cuts would derail disinflation, but the European Central Bank must become increasingly cautious as rates go lower, ECB board member Isabel Schnabel said on Friday.

That is the most dovish comment from the normally hawkish Schnabel this year.

Governing Council member Francois Villeroy de Galhau backed a cut in interest rates next month after data showed a marked slowdown in inflation in August.

The ECB should anticipate future progress in containing price increases, according to the Bank of France governor. He expects inflation to be sustainably at the 2% target by the first half of 2025 in France, with the rest of the Eurozone following by the end of the year.

A prominent fund manager was quoted last week as saying that the Eurozone’s social and economic model is “broken” and in need of radical change.

Konstantin Veit, portfolio manager at Pimco, commented that reliance on China and India for manufactured goods was a particular issue, while imports of Russian energy drove inflation to unacceptable levels and the Ukraine war has shown that the region’s reliance on NATO for defence is as strong as ever.

A recession is there in the short term.

Germany is playing catch up in terms of public investment, it has lagged in that regard for twenty years. And there is more urgency there now in terms of defence spending, but also climate transition spending.

The euro has begun its long march back to the levels it saw a year ago.

Last week, it fell to a low of 1.1043 and closed at 1.1048.

Have a great day!