13 November 2023: Hunt likely to cut business taxes


  • The economy flatlined in the third quarter
  • Moody’s lowers the U.S. credit rating from stable to negative
  • No rates cut for at least two quarters says Lagarde
GBP – Market Commentary

Autumn statement to “unlock growth”

In an interview on Friday, Chancellor of the Exchequer, Jeremy Hunt, supplied some insight into the autumn statement that he will present to Parliament later this month.

He stressed that the economy has immense potential to grow at a rate which will allow him to cut taxes and his plans are to unlock that growth.

He intimated that he would cut taxes on businesses, while any changes to personal taxation will have to wait until next Spring.

There is speciation that the cuts to business taxes could be as much as ten billion pounds. He has, however, been warned by his back bench colleagues that squeezing benefits paid to individuals and families to fund the tax cuts will be a retrograde step which will jeopardize any hope that MPs with marginal seats have of being re-elected in next year’s election.

Hunt will need to be aware of the inflationary effect of any cuts to taxation, since headline inflation is slated to possibly fall below 5% when the October data is published on Wednesday since he won’t want to be the cause of any further rate increases while the Bank of England is committed to bringing down prices.

Last week was a poor one for the economy, although Hunt tried to inject some optimism into the release of the third quarter GDP data. The numbers showed that the economy flatlined in the period between July and September produced zero growth. Hunt said that this was positive since many analysts had predicted a contraction.

The Shadow Chancellor, Rachel Reeves, countered by saying that Hunt’s remarks show just how out of touch the Government is, and predicted that whenever the Prime Minister decided to hold the Election the result will see Labour returned to power.

Bank of England Chief Economist, Huw Pill, reaffirmed his remarks about a rate cut in a question-and-answer session on Friday. He repeated that it is not unreasonable for the market to expect a rate cut next summer, the first Central Banker to do so.

Two sides of the rate argument will be seen this week with MPC hawk Elizabeth Mann speaking later today, while Swati Dhingra who in a year of MPC membership has never voted for a rate increase speaks tomorrow.

Before the publication of the October inflation report on Wednesday, the October employment report is due for release tomorrow. The claimant count is expected to continue its recent trend higher as the rate hikes that have already taken place work their way through the economy.

Last week, the pound saw a moderate fall against a strengthening dollar. It fell to a low of 1.2213 and closed at 1.2233.

USD – Market Commentary

Consumer confidence may have peaked

Last week, there was a noticeable hardening of the FOMC to the idea that the Fed’s next interest rate decision will be a cut, buy only after an extended period where rates remain unchanged.

Several FOMC members including Fed Chair Jerome Powell took a more hawkish stance over inflation than the market was expecting.

Powell said that he was “not confident enough is being done to bring down inflation”. He feels that rates are still in a neutral position and not restricting demand sufficiently for inflation to be “under control”.

He acknowledged the progress that has been achieved over the past year, but the decision of the FOMC is open to question until the goal of inflation reading a sustainable level of 2% is achieved.

The October inflation report is due for publication tomorrow, and the market is now bracing itself for an unexpected result with many analysts predicting that the headline rate will remain unchanged at 3.7%.

Austan Goolsbee, the President of the Chicago Federal Reserve, has become something of a mouthpiece for the Fed in recent weeks. Last week, he raised concerns about the possibility of further rate hikes despite seeing the risk of an overshoot if bond yields are still high.

He is due to speak again following the release of the inflation report and the market will be keen to see what he has to say, especially if it is disappointed with the data.

Moody’s, the global rating’s agency, dropped a bombshell last week by announcing a cut in the country’s rating outlook from stable to negative.

They cited the elevated level of interest rates and a deterioration caused by ineffective fiscal measures for their decision. The recent brinkmanship over the Federal Budget is likely to continue right through until next year’s election which will also cause a degree of uncertainty.

Retail sales data is also due for release this week, and it may show that the consumer is beginning to lose confidence in the economy. It is expected that sales fell by 0.1% in October following a rise of 0.7% in September.

Last week, the dollar index continued its recovery from the weaker employment report. It climbed to a high of 106.00 and closed at 105.80.

EUR – Market Commentary

Lagarde also intimates that rates have peaked

The Governor of the Banque de France, Francois Villeroy de Galhau last week confirmed his belief that interest rates in the Eurozone have peaked, a belief that he shares with his colleague ECB President Christine Lagarde.

He spoke of inflation having clearly passed its peak and the economy being sufficiently resilient to cope with an extended period of high interest rates. He also believes that it is far too soon for any discussion to take place on when the Central Bank may consider rate cuts.

Inflation is generally accepted to be on a downward path, although the fall will not be linear, and it will take until 2025 to reach the Central Bank’s target of 2%.

Monetary Policy must now be guided by patience and confidence that rates are sufficiently restrictive.

De Galhau went on to say that the current state of the Eurozone economy fully justifies the end to the cycle of rate increases.

Lagarde was definite in an interview with an Irish Newspaper that there would be no rate cut for “a couple of quarters”. While the economy is seeing very little prospect of growth and may even see a mild recession, driving inflation down, towards the 2% target, is vital to achieve long-term stability.

Lagarde is still concerned that the conflict in the Middle East may lead to a spike in energy prices to which the Eurozone is particularly vulnerable. This could lead to a spike in inflation, but she is confident that rates are sufficiently restrictive not to need to be raised again.

Data released last week showed that the economy continues to suffer. Pan-Eurozone retail sales fell by 2.9% in October following a 1.7% fall in September as consumer confidence remained weak.

This morning will see the publication of the ECB’s forecasts for growth across a number of time horizons. It will be interesting to see if the Central Bank shares Mario Draghi’s view, expressed last week, that the Region will be in recession by the end of the year.

The euro is not attracting much buying interest as the “crutch” of tighter monetary policy has been removed. Last week, the common currency fell to a low of 1.0656 and closed at 1.0685.

Have a great day!

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Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.