16 March 2023: Budget for pensions and childcare

Jeremy Hunt delivered a Budget yesterday in which he lent heavily on outside agencies opinions on the UK economy for validation of the Government’s strategy for a revival of growth post-pandemic and post Brexit.

The IMF, which had been severely critical of the plans put forward by Liz Truss during her brief term as Prime Minister, commented recently that the strategy that the country is following will, in time, reap the rewards of steady, if not spectacular growth and controlled inflation.

The Chancellor made two bold statements that formed the cornerstones of the entire presentation. Again leaning heavily on the views of outside agencies, this time the Office for Budget Responsibility, He predicted that the UK economy will not face a recession this year, and by year-end inflation will be below 3%.

In what he labelled a back to work budget, Hunt, as expected, provided four billion pounds in additional support for childcare in order to encourage parents to be able to consider a return to the workplace.

One move that drew heavy criticism for the opposition benches was the scrapping of the upper limit on private pension pots before they attract tax.

Overall, Hunt had been expected to deliver a low-key, almost boring budget, which is exactly what he provided.

Rishi Sunak, a little more than six months into his job as Prime Minister, was fulsome in his praise for his Chancellor, who continued the theme of immigration by easing the requirements for the issuance of work visas to several trades, including bricklayers, plumbers and carpenters which will ease the bottlenecks seen currently in the construction sector.

While Hunt was comfortable predicting that there would be no technical recession this year, the OBS did comment that it believes that overall, the economy will contract by 0.2% this year before returning to growth in 2024 and 2025.

Hunt made no mention of what the Bank of England needs to do in order to bring inflation down to his target of being below 3% by year-end.

The Monetary Policy Committee remains fairly divided over the size of the next hike, or even if there should be one at all.

The markets received the budget quite well, although Sterling spent the day under pressure from the turmoil that remains in the banking sector.

The pound fell to a low of 1.2010, cloning at 1.2057 as it erased all the gains it had made this week.

The Treasury and Federal Reserve continue to shoulder the burden of the fallout from the collapse of Silicon Valley Bank, as the market was rocked further by an announcement from the largest single shareholder in Swiss banking giant, Credit Suisse, that it was not prepared to pump any more capital into the bank.

This announcement sent its shares into free fall, and they lost more than 30% of their value and reached a new low.

The news undermined confidence in the banking sector and raised new fears of contagion. The bank called on the Swiss Central bank and the regulator to issue statements of support, while overnight they announced that they had secured funding of fifty-four billion dollars from the Central Bank.

The news of the escalating turmoil in the markets prompted the prominent global investment bank, Goldman Sachs, to make the bold prediction that the FOMC will stand pat at its March meeting and not hike interest rates as had been generally expected.

While that would likely add support to the overall market, many analysts and commentators disagree since it would not provide much aid over such a sector specific issue.

Credit Suisse had been beset with problems long before the collapse of Silicon Valley Bank, although fears of a significant retracement in the sector may have been the final straw which prompted the Saudi Central Bank, the bank’s largest shareholder, to decide that it wished to retrench and not provide any further capital.

The Fed’s plans for the continued reduction in inflation that were expected to see rate hikes continue deep into the second quarter, have been shredded by the turmoil, although its chairman has been silent so far.

Senator Margaret Warren, one of Jerome Powell’s fiercest critics within the legislature, laid the blame for the problems in the financial sector firmly at the feet of the Fed Chairman yesterday. She cited his role in the de-regulatory process as being a significant factor in the collapses seen recently of banks who weren’t sufficiently regulated.

The dollar index rallied strongly yesterday, as it often does in periods of risk aversion, as investors look for safe havens and ample liquidity.

It rose to a high of 105.10 and closed at 104.75.

With jobs and inflation data being replaced by issues with the financial sector and risk appetite, the Greenback is likely to see further volatility up until the next meeting of the FOMC and possibly beyond.

While she obviously doesn’t possess a crystal ball, Christine Lagarde’s credibility as President of the European Central bank will have been severely damaged by her testimony before the European Parliament recently in which she confirmed that interest rates would be raised by fifty basis points at today’s meeting of the Bank’s Governing Council.

An ad hoc poll of prominent economists conducted yesterday by a German newspaper showed that only one-in-four believed that the Central Bank should go ahead with a fifty point hike, although the overnight news that Credit Suisse had secured significant funding from the Swiss National Bank may have tempered those views somewhat.

Lagarde’s predictions of a fifty point hike later today now look to have been at least ill-advised and even possibly a significant, although unlikely to be fatal, mistake.

For her to resign or possibly be replaced as President of the ECB now would add to the turmoil surrounding the financial sector, while she is considered to be the glue that binds together the current efforts to bring inflation down.

Short-term interest rates are also approaching a critical point at which they will begin to have a major effect on demand, and Lagarde;s brand of diplomatic handling of the various factions within the Central bank and wider Eurozone is seen as being critical to a potential soft landing for the economy.

The fact that inflation remains stubbornly high in the Eurozone may well be the deciding factor in today’s monetary policy decision. Given the assumed proximity of rates turning neutral after a long period of being supportive, it may be felt that the Central Bank had missed an opportunity in not hiking by fifty basis points. This may undermine the market’s level of confidence, which will have a significant effect on the single currency and promote a collapse, leading to further uncertainty.

The euro fell yesterday as the market looked for safe havens as risk aversion grew. It fell to a low of 1.0516, threatening daily support at 1.0540, but recovered to close at 1.0577.

Volatility will remain high as the market considers the possibility of contagion in the financial sector, and vultures eye any institutions that may be considered weak in the current climate.

Have a great day!