19 February 2025: Reeves’ mire is getting deeper

The right-wing press in the UK is in no mood to let Rachel Reeves off the hook about the possibility that she was involved in an expenses scandal during her time at HBOS or the embellishment of her CV on the professional’s social media site LinkedIn.

Having upset pensioners by introducing means testing of their winter fuel payment and farmers by introducing a 20% inheritance tax on family farms valued more than one million pounds, Reeves placed a target squarely on her back.

Journalists are poring over every piece of her past, looking for discrepancies with which to “twist the knife” even further.

While Sir Keir Starmer openly supports his Chancellor, in private he must be concerned that there is potential for his vast majority in Parliaments undermined by Reeves’ unpopularity.

The number of insolvencies is at a sixteen-year high. This is a factor of the tough economic climate faced by the UK post-pandemic. However, the media is painting this as a direct consequence of the tax increases introduced in the Budget last October that will come into effect in April.

For example, Hair salons are among those at risk after the country was hit by a ‘wave of insolvencies,’ according to a Confederation of British Industry report, which has been widely reported in the press.

The industry body’s data arm, CBI Economics, said the looming rise in employer National Insurance contributions and the minimum wage could make employing staff and apprentices unaffordable for the sector while ignoring other possible factors to lay the blame firmly at the feet of the Chancellor.

The Office for National Statistics reported that the UK added 107k new jobs from October to December, significantly higher than the 35k added in the three months to November.

The employment data contradicts Bank of England (BoE) Governor Andrew Bailey’s warning that he sees some softness in the labour market.

Bailey also said that the economic outlook's sluggish and surprisingly upbeat Q4 Gross Domestic Product (GDP) data had not changed the “bigger picture”. In February’s monetary policy statement, the BoE halved its growth forecasts for the year to 0.75%.

In addition to strong employment figures, Average Earnings data, a key measure of wage growth, accelerated in the three months ending December. Average Earnings, excluding bonuses, accelerated to 5.9%, as expected, from the prior reading of 5.6%. Meanwhile, Average Earnings, including bonuses, rose by 6%, faster than estimates of 5.9% and the former release of 5.6%.

High wage growth momentum would prompt inflation expectations and force the BoE to hold interest rates at 4.5%.

The pound reacted positively to the data, climbing to a high of 1.2628 before day traders took the opportunity to take profit on long positions, driving the pound to a lower close at 1.2606.

The summit talks between high-ranking diplomats from Russia and the U.S., which took place in Riyadh yesterday, were roundly criticised by the European Union and Ukraine for not including them since they will be directly affected by any decisions made regarding the conflict in Ukraine.

Russia has gained significantly from its acceptance back into the “international fold” by President Trump and feels sufficiently emboldened by this to make major demands for any cease-fire. The boldest of these is the refusal to allow troops under any flag to be permanently stationed in the former USSR satellite state.

Trump has taken aim at Ukraine after its president, Volodymyr Zelenskyy, said it was a "surprise" that his country was not invited to peace talks in Saudi Arabia to end the Ukraine war.

Trump said he was "disappointed" by Ukraine's reaction and appeared to blame Ukraine for starting the war, saying the country "could have made a deal".

Russia and the US said they had agreed to appoint teams to start negotiating the end of the war.

Speaking to reporters at Mar-a-Lago, Trump was asked by the BBC what his message was to Ukrainians who might feel betrayed.

"I hear that they're upset about not having a seat, well, they've had a seat for three years and a long time before that. This could have been settled very easily," he said.

Trump’s comments signal a major turning point in the American attitude to the conflict.

Trump's chief economic adviser and newly appointed “envoy” to the Federal Reserve has stated that Jerome Powell, Chair of the US Federal Reserve, is an independent figure and the Federal Reserve's autonomy is respected.

However, he added: "The President's opinion should also be heard since he is the President of the US."

Kevin Hassett, the director of the National Economic Council, also mentioned that Trump and Powell will hold regular meetings.

Federal Reserve policymakers have warned against moving too soon with an interest rate cut, despite pressure from President Trump to trim the Federal funds rate.

Speaking at the University of New South Wales in Australia on Monday, FOMC member Christopher Waller argued that a "pause in rate cuts is appropriate" given the still-strong performance of the labour market as well as the elevated Consumer Price Index.

Readings from last month's Inflation data show that CPI remains above the Fed's target of 2%, with progress to tame it "excruciatingly slow over the last year", according to Waller.

San Francisco Federal Reserve Bank President Mary Daly agreed that while there is no reason to be discouraged about bumpy and sometimes imperceptible progress toward 2% inflation, the Central Bank should keep short-term borrowing costs where they are until the progress is more visible.

"Policy needs to remain restrictive until we are really continuing to make progress on inflation," she told a community banking conference hosted by the American Bankers Association in Phoenix, Arizona.

The dollar appears to have found a degree of support following a significant correction in recent days. Yesterday, it rallied to a high of 107.12 and closed at 107.05.

The Greenback is still fundamentally supported by contrasting views of G7 monetary policy but may still face downward pressure from announcements of tariffs and retaliation against them from major trading nations.

German Economy Minister Robert Habeck said that European democracy is threatened by dependence on “technology oligarchs.” He called for the creation of “our own European communication platform” instead to rival X, formerly Twitter.

The EU's dependence on Silicon Valley poses a threat to European democracy, in Habeck’s opinion. According to him, the European Union should get rid of its dependence on "technology oligarchs" such as Elon Musk, whose influence poses a "threat to European values.

The world may have gone too far down the road to acceptance of U.S.-developed tech solutions to turn back now, given the level of investment necessary to create such platforms.

In particular, Habeck accused Musk of promoting a "hypocritical vision of free speech" while keeping his business models and algorithms as strictly protected as "state secrets.

Germany has lost almost a quarter of a million manufacturing jobs since the start of the COVID-19 pandemic, as companies and politicians sound the alarm that Europe’s industrial heartland is suffering an irreversible decline.

As German voters prepare to go to the polls on Sunday, data highlights the struggle of Europe’s biggest economy to cope with high energy costs, consumer malaise and fierce competition from China.

This trend has piled pressure on political parties to find remedies.

Friedrich Merz, tipped to be next Chancellor, warns that the country risks deindustrialisation with industrial groups “going abroad in droves, taking their money abroad.”

Once gone, these investments in domestic production were “not coming back,” the leader of the Christian Democratic Union (CDU) warned.

Interest-rate decisions by the European Central Bank shouldn’t overlook the tightening effect on monetary policy from unwinding past asset purchases, according to Executive Board member Piero Cipollone.

In comments at an event in Rome, the Italian official said that while policy rates remain the primary instrument to adjust the ECB’s stance, the role of quantitative tightening in influencing financial and financing conditions through the yield curve or bank lending should also be considered.

“To strike the right balance, we should ensure that our rate decisions adequately compensate for the tightening induced by the reduction of our balance sheet,” Cipollone, one of the ECB’s most dovish policymakers, said.

The Eurozone is showing very early signs of an economic recovery that is unlikely to be derailed by the tariffs the Trump administration has threatened thus far.

But that doesn’t mean European policymakers can let their guard down. Many investors and economists believe the eurozone will continue to be stuck with low growth in 2025.

The consensus among economists is for the bloc’s real gross domestic product (GDP) growth to hover around 1% in 2025, only a little higher than the 0.7% achieved in 2024 and well below the United States expected 2% pace.

This assumes the region’s struggling manufacturing sector, the main drag on growth in 2024, will continue to sputter due to high energy costs and a lack of demand, particularly from China. But this pessimism may be overdone.

The Euro remains on an overall downward trajectory, even as its path to parity has been delayed, if not derailed by Donald Trump’s flip-flopping on Tariff policies.

It fell to a low of 1.0435 yesterday and closed at 1.0447.

Have a great day!