30 July 2024: Hunt is chastened by the “black hole”

Rachel Reeves gave her first major speech as Chancellor to the House of Commons yesterday, addressing the government’s plans to deal with the “black hole” that has been found in the nation’s finances.

She blamed the shortfall squarely on the door of her opposite number, former Chancellor, Jeremy Hunt.

Reeves spoke of several confirmed projects for which the funding was not in place.

She told the commons that several projects that had been executed to start this year, will be scaled back, or shelved entirely.

She also announced that to plug the shortfall partially, she had made the difficult decision (her words) to cut the number of pensioners who receive the Winter Fuel Payment. It will now only be available to those pensioners who receive pension credits or other means-tested benefits.

This has angered pensioners groups, who see themselves as a soft target.

There was better news for public sector workers, with junior doctors the major winners. Having taken strike action in support of their 35% pay claim, the doctors’ representatives have agreed to put a 22% pay award to their members.

There will also be “across the board” pay increases for other NHS staff and teachers, who will receive 5.5% and 6%, respectively.

Reeves announced that the full spending review and the Budget will be presented to MPs in October.

In response, Hunt could only speak of how in her first major speech, Reeves had betrayed the trust that had been placed in her by the electorate. He was virtually “laughed out of the room” by Government MPs, which illustrates perfectly how far the Conservative Party’s stock has fallen and the significant task that the six candidates for the Party’s leadership face.

Following the public sector pay awards and the scaling back of several infrastructure projects, Reeves was adamant that the inflation-busting wage increases wouldn’t cause a rise in inflation since they are below the current level of wage increase despite being significantly above the current inflation rate.

The Office for Budget Responsibility are most likely leafing through Reeves’ plans and will pronounce their views in the coming weeks. Meanwhile, the Monetary Policy Committee of the Bank of England, which meets this week, is likely to discuss the wage increases, and this is likely to deter it from cutting interest rates this month and next.

The Labour Party is intent on not wasting the opportunities afforded to it by the huge majority it commands, and there is truly little the Opposition Parties can do other than accept the shortcomings that led to this situation.

Sterling fell to a low of 1.2806 yesterday in the wake of Reeve’s announcement regarding public sector pay, but it rallied strongly to close at 1.2862 as it became clear that the inflationary effect may deter the MPC from cutting interest rates.

Economists at the major Wall Street banks have revived thoughts of a soft landing, where job creation and the economy and job remain positive, while inflation falls close to the Federal Reserve’s 2% target.

A soft landing had faded from the market’s consciousness during the second quarter as the monthly jobs data was still positive, but inflation turned “sticky” leading a few members of the FOMC to consider a preemptive rate hike which may well have set growth and output data on the back foot.

Jerome Powell has been proved right in his desire to leave interest rates for what is about to become a full year. This has seen inflation clear the “hump” it had seen and has now begun to drift lower as the Fed takes advantage of the time afforded to it by the economic performance in the first half of the year.

While no cut is expected following the FOMC meeting which begins today and concludes tomorrow, Powell is expected to be more dovish when speaking at the press conference which will follow the announcement.

Once the meeting is out of the way, we can expect several members of the Committee to make their views known to the market about the prospect of a rate cut in September, to be followed by one or two more in the fourth quarter and into the first quarter of 2025.

Today will see the publication of the first of the week’s employment market data, with the release of the JOLTS job openings report for June.

It is expected to show a slight fall from May’s number as the number of openings has fallen gradually from what was termed “the great resignation” which happened in May 2022.

“Quits” and what is termed “voluntary separations” have fallen as the jobs market has seen workers value their jobs more and not “job hop” chasing higher wages.

Prominent economists and analysts continue to emphasize the historic and extraordinary performance of the American economy in recent years, despite the significant hurdles caused by high inflation and the level of interest rates required to bring it down.

Last week’s surprise announcement of a GDP of 2.8% for the second quarter surprised observers who believed that growth would be hard to come by given the continued high interest rates.

The dollar index rallied to its highest level for two weeks yesterday as any market hopes for a rate cut this month were extinguished.

It reached a high of 104.75 but drifted lower to close at 104.57.

The ECB is continuing to search in the “dark corners” of its Frankfurt offices to try to find reasons to justify the hawkish sentiments of some of the more hawkish members of its Governing Council.

Back in June, the rate-setting committee was unable to find any cogent reasons to leave rates unchanged and found itself “painted into a corner,” leaving itself with little or no opportunity to do anything other than to cut rates.

Isabel Schnabel and her fellow hawks are trying desperately to find reasons to leave rates unchanged until later in the to allow inflation to fall close to, or even below, the ECB’s 2% target.

It is interesting to note that despite the upheaval that has been seen recently with G7 inflation rising close to, and in one case above, double figures after several years of benign price rises, the target for the ECB, Federal Reserve and ECB remains at 2%.

There has been almost no discussion from the doves on the various committees like Fabio Panetta in Italy, Swati Dhingra in the UK, or Raphael Bostic of the FOMC regarding “moving the goalposts.”

Given the volume of data that is due for release for the Eurozone overall and several individual members, it may be that this week, the “die is cast” for monetary policy going forward.

Today will see GDP data released for Spain, Italy, and Germany, as well as the entire Eurozone, consumer confidence for the entire region, Spanish inflation, and French consumer spending.

The Eurozone has become so fractured under the Presidency of Christine Lagarde that the data tends to focus the attention of individual Central Banks on their economies, often to the detriment of the whole.

It has taken close to two hundred and fifty years for the U.S. to reach its current level of togetherness, so, understandably, in less than thirty years the individual states of the Eurozone are still somewhat driven by their own needs and requirements.

The Euro faced some selling pressure yesterday as the diverging monetary policy was again the subject of significant discussion. Although Isabel Schnabel spoke recently of her view that rate cuts would be roughly synchronized between the Fed and the ECB it is becoming that to achieve similar levels of growth and activity, the ECB may have to go further in loosening monetary policy.

Yesterday, the single currency fell to a low of 1.0802 but recovered a little to close at 1.0815.

Have a great day!