Discussion over taxes to give the PM a rough ride

The Prime Minister faces a bumpy ride as discussions begin about what he believes to be one of his major election manifesto pledges. The increase in social care benefits may require a rise in taxes and has been labelled as taxing the young to ensure that the old are able to cling on to their homes.

The cost of social care has rocketed as the population has aged, with relatively few of the population making sufficient allowance for the care they will need once they retire from work.

The current level of National Insurance that is paid will not come close to covering the cost of the care needs of the majority of the population.

Add to that the backlogs being seen by the National Health Service, with those needing routine procedures at record highs.

There is set to be a revolt by Conservative Members of Parliament should a programme of tax rises be announced by the Chancellor, which has the backing of the Prime Minister.

Those who will potentially revolt believe that the use of a proposed increase in National Insurance contributions breaches a manifesto pledge, despite Johnson promising to increase spending on social care.

There is a growing coalition of MPs, Trades Unions and several business groups which point to a pledge not to raise income tax, VAT, or most importantly National Insurance.

It is believed that the proposal will be to add 1% to both employers and employees contributions and raise about £10 million annually.

Given that the pensioners who will benefit most don’t pay national insurance, the entire proposal is considered biased in favour of those in most need.

Even Rishi Sunak is believed to have doubts about the proposal.

The majority of those against the scheme believe that the funds should come from additional taxes raised as the economy recovers and powers ahead post-Brexit.

Former Prime Minister John Major called the proposal regressive, while other MPS believe that it is not the Conservative way

The pound continued to rally against a weakening dollar last week, inspired by several weaker than expected data releases.

It rose to a high of 1.3891, closing at 1.3874. More gains are expected if the Fed looks like delaying its cuts to support for the economy

Considering your next transfer? Log in to compare live quotes today.

Large upwards revision in July data makes little difference

As was reported on Friday, the risk from the August employment report was very much to the downside, and so it proved.

Just 235k new jobs were created in August. This fell well below the predictions of just about every analyst, trader, economist, and investor.

While it was predicted that the third quarter would see more bumps in the road than were seen in the second.

Several other data releases were below expectations, including PMI’s for both services and manufacturing. As part of the employment report, the unemployment rate fell to 5.2%, while average earnings rose. Both these add to inflation expectations further down the road.

There has been a growing feeling that all is not well with the economy, as Regional Fed Presidents have become a little too strident in their view that the withdrawal of support will happen sooner rather than later.

While Jerome Powell has continually said that the FOMC looks at trends not a single data release, data over the past couple of weeks has taken on a far more negative tone.

There were some bank’s analysts who had interpreted the words of the more hawkish FOMC members as a sign that there could be a cut in the level of asset purchases as soon as this month’s meeting, but that has now been almost entirely put to bed.

While there is expected to be a slow start to the week as the U.S. celebrates Labor Day weekend, there are expected to be comments from both Powell and his colleagues that update the market of the Fed’s intentions.

The pall of doubt that had surrounded the economy started with a marginally more dovish form of words chosen by Powell in his address to the Jackson Hole Symposium.

There is also expected to be some clarity provided by President Biden regarding his intentions towards the position of Fed Chairman, following the pressure he has felt from Party colleagues over Powell being replaced.

The dollar index fell following the release of the data. It fell to a low of 91.94, closing at 92.12. Support is at 91.80 and a break could see expectations grow of a fall to 91.20.

Talk of a cut to support growing

The recent data that has emanated from the Eurozone has been far more supportive than even the Central bank had imagined.

The lower for longer mantra that has been adopted for the region’s interest rates, which saw the proposition aired that rates may stay unchanged until 2025 is now surely dead in the water.

Inflation rose to a level not seen in years, with the headline reaching 3%. With data, particularly forward-looking indicators like confidence reports for both industry and the consumer, beginning to point north, Christine Lagarde’s plans for a gradual withdrawal of support now looks to be outdated already.

She is now sure to face further pressure from hawkish members of the Governing Council, provided the data continues to point to a stronger recovery.

There are reports that the ECB could begin to taper its asset purchases as soon as this week as inflation threatens to get out of control.

While that seems to be an overly hawkish outcome, it would certainly sate the appetite of the inflation hawks. But what would it do to the long-term prospects for those economies that will require support for some time to come?

It is more likely that there will be comment about the Bank being more observant of inflationary factors.

This week will see the release of data for Q2 GDP (final), and economic surveys for both the Eurozone and, just as importantly, Germany.

The euro reacted positively to the U.S. data released on Friday. It rose to a high of 1.1909, closing at 1.1884. More optimistic Eurozone-watchers will be looking towards a test of 1.20, but that may turn out to be a bridge too far.