Budget Misery For Many
Jeremy Hunt presented his first budget as Chancellor last Thursday, which had been cooked up with the input of Rishi Sunak, the Bank of England and the Office for Budget Responsibility. It was a dour and depressing affair; indeed, his double act with Rishi Sunak is a long way from being a Chuckle Brothers tribute show. With higher tax rises for many, now assured as the threshold for the top rate is lowered whilst capital gains and corporation tax are reset to gather more. The worst hit in many ways are those that the country should be encouraging the entrepreneurs and the start-up businesses that drive the nation. Whether as many fear we will return to the brain drain of the 1970s, time will tell, but the incentives to build a business and a life in the UK are certainly less this Monday than a week ago.
The perceived logic is that fiscal prudence is good for a currency will now be put to the test. Indeed, despite recovering before the weekend, the initial reaction by sterling was adverse as it gave back some of the near 5% gain it had made in the week leading up to the statement. The challenge now will be to cap inflation which, in some measure, the budget will do, but it is hard to imagine that an inflation rate of over 11% can be brought down with Base Rate of 3%. The Bank of England, and indeed the Chancellor, are both erring down the dovish flight path and expectations are now for a 50bp rise in the cost of borrowing in December. With the Fed still looking to raise rates higher and somewhat more hawkishly than the Old Lady, sterling could be set for an uncomfortable run-up to Christmas.
With Turkeys and pumpkin pie being prepared across the US and thoughts turning to Thursday’s festivities, there could be a quiet few days ahead for the currency markets. There is little on the data horizon apart from New Home sales which will no doubt continue to show further signs of weakness, and Durable Goods, which are forecast to be relatively healthy due to solid aircraft sales. Whilst forecasting data is always tricky, what is certain is that the Federal Reserve officials will continue in full-on hawkish mode and most certainly won’t be full of the festive spirit. As we have said previously, the last thing that the Fed wants to happen is for the markets to give the consumer the wrong message. There is a danger that with a booming stock market, the average Joe will think that the worst is over and that financial conditions are about to ease, encouraging a mini-boom that could undo all the hard yards that the Fed has put over the last months.
There will undoubtedly be some prayers rising from Downing street over the next few days that the kindly seas that the good ship UK has been sailing through will continue for a while longer. As Napoleon said, he always preferred his generals to be lucky, and so far, the Chancellor and the Governor of the Bank of England have been lucky. The setback in the dollar’s fortunes has helped, and with a holiday-shortened week in the US ahead, Lady Luck may continue to smile over them. There is little fresh macro data out in the UK this week. The highlight is the monthly Purchasing Managers Indexes, which are unlikely to be too cheery, released on Wednesday. We will also get to hear from several members of the Bank of England’s rate-setting committee who will try and pave the way for what will most likely, as we said earlier, be a 50 bp rise at December’s meeting.
Europe also has a quiet week ahead. As in the UK, the focus will be on the Purchasing Managers Indexes released on Wednesday, which, as the eurozone lurches into recession, are expected to disappoint. Germany has some sentiment surveys scheduled for Thursday and Friday, and no doubt council members from the European Central Bank will pipe up the most influential likely to be Isabel Schnabel, on Thursday. Thursday also sees the release of last month’s ECB meeting minutes, which may shed a little light on how hawkish they really are. Outside of the eurozone but most definitely in Europe, the Swedish Riksbank holds its monthly meeting. With inflation still beating the central bank’s forecasts, we expect another 75bp rise leaving the Riksbank in line with ECB expectations.
With stories of the losses from the FTX crypto debacle still emerging, this holiday-shortened week could see some unexpected volatility if other crypto exchanges start to suffer. There is also the fear of contagion in other established markets, and signs are that liquidity is starting to dry up, which is certainly not good news. With this in mind and the latest reports on China’s Covid cases non too bright, it seems reasonable to expect a rebound in the dollar this week as investors return to seek its haven status. Have a good week, and be careful out there.