21 August 2025: Reeves’ “three-card trick” is getting seen through

This is the time of year when speculation mounts about the Government’s plans for raising money to fund increases in everyday spending, which will be announced in the budget in the Autumn. This year will mark Rachel Reeves' second budget, with the “ripples” still being felt from her first attempt throughout the economy.

The increase in employers' national insurance contributions and minimum wage were a major concern for businesses of all sizes, with the hospitality sector most badly hit, while the changes to inheritance tax saw farmers protesting in Westminster.

Reeves is sticking by her flimsy pledge that she won’t increase income tax, national insurance or VAT for ordinary working people, even though what she did last year drove the economy close to recession and affected everyone.

That economic “sleight of hand” may be typical of politicians, but Labour pledged to be different in its manifesto, governing the country with clarity and a sense of fairness. So far, all we have seen is more of the same across the entire Cabinet.

Inflation data was published yesterday, and it showed that in the year to July, prices rose by 3.8%. This is almost double the Bank of England’s target rate.

This would normally do away with any thought of a further interest rate cut, but it is felt in the City that since inflation is expected to fall “organically” over the next six months that the Bank won’t need to tighten, or at least not loosen, monetary policy in the intervening period to bring it down.

It is becoming a feature of both fiscal and monetary policy that the “good times” are just around the next corner.

Rachel Reeves has urged the public to be patient with Labour on the economy, saying that the change they voted for in last summer’s election was “never going to happen overnight”.

The Chancellor insisted she was “impatient” to deliver and said ministers had made a start on turning things around, but there was “lots more to do” as she blamed the last Tory government for the nation’s financial problems.

The speculation over changes in stamp duty and eventually ending council tax has met with a mixed reception. While any changes that will affect the weekly wage packet of working people are being welcomed, Reeves is again targeting a single sector of the economy. There is more work to be done on stamp duty to ensure that people who have worked hard all their lives and managed to buy and maintain their own home are not penalised.

The pound made it three consecutive days of losses this week as it fell to a low of 1.3447 and closed at 1.3456.

During my early days in the markets, international trade was the most important single piece of data published monthly. As the market gradually evolved, and numbers which reflected the state of the economy came to the fore, employment, which provides a snapshot of the state of the entire economy, came to the fore. If job creation is positive, it is felt by consumers, small businesses and multinationals alike, while it allows economists to pontificate on future trends.

Nowadays, the monthly non-farm payroll numbers have taken on a life of their own, with speculation about the data almost creating its own market.

That may be about to change again.

Following the July employment report, President Trump sacked the Head of the Bureau of Statistics, accusing her of “massaging” the numbers to make him and the Republican Party look bad.

Erika Macentarfer, despite sounding like a character from the Rocky Horror Show, is a renowned economist who had worked for the Federal Government since 2003. Her unceremonious dismissal and her replacement with E.J. Antoni are a serious threat to capital market stability.

Even more disturbing is Antoni’s lack of experience and his well-documented affinity towards Donald Trump, as witnessed by his presence at the Capitol insurrection.

Although Trump’s criticism of the Federal Reserve and its Chairman has received more column inches than the firing of the Head of the BLS, in their own way, both are equally significant.

J.P. Morgan’s Chief Economist rightly pointed out earlier this month that the Treasury Inflation-Protected Securities Market is now vulnerable to data manipulation.

The impact of losing trust in U.S. economic data would be felt far and wide. If there is a significant rebound in the first payroll number overseen by Antoni, there is bound to be speculation about data veracity, and that would be just the start.

The split in the FOMC between Regional Presidents and Members of the Board of Governors is becoming more pronounced. The minutes of the Federal Reserve's July meeting, released yesterday, showed that policymakers were more concerned about the risk of inflation from the impact of tariffs than the labour market as they debated interest rate policy.

The Federal Open Market Committee (FOMC), the Fed panel responsible for monetary policy decisions, voted 9-2 to leave the benchmark federal funds rate unchanged for the fifth straight meeting at a range of 4.25% to 4.5% in July.

That decision occurred despite the first dual dissent in favour of cutting rates since 1993, as Governors Michelle Bowman and Christopher Waller supported a 25-basis-point cut due to risks they saw to the labour market.

"Participants generally pointed to risks to both sides of the Committee's dual mandate, emphasising upside risk to inflation and downside risk to employment," the FOMC minutes said. "A majority of participants judged the upside risk to inflation as the greater of these two risks, while several participants viewed the two risks as roughly balanced, and a couple of participants considered the downside risk to employment the more salient risk."

The dollar index reacted positively to the minutes, although their content was widely predicted. It rallied to a high of 98.44, although it fell back later to close at 98.25.

The outlook for the EU is increasingly fraught, according to European Central Bank President Christine Lagarde, and yesterday European markets responded bearishly to forecasts of an imminent "slowdown in third-quarter growth linked to the fading front-loading effect."

Lagarde highlighted that first-quarter growth had exceeded expectations as "importers increased inventories in anticipation of higher tariffs.”

However, a backlash now appears imminent, with Eurozone GDP dropping from 0.6% in the first quarter to the current 0.1%, and industrial production falling by 1.3%.

Lagarde, fresh back from her summer break, went on to say that the US-EU trade deal has eased but “certainly not eliminated” global uncertainty. Speaking at a panel at the World Economic Forum in Geneva, Ms Lagarde said the deal had left the effective US tariff rate for European Union goods at between 12 percent and 16 percent.

The tariff rate was “somewhat higher” than the ECB had forecast, she said, adding that US President Donald Trump’s plans for sector-specific levies on pharmaceutical goods and semiconductors remain unclear.

The ECB expects Eurozone activity to slow in the third quarter of 2025, after a strong start to the year. Ms Lagarde said that “global growth has remained broadly steady so far” but cautioned that “this resilience has been mainly driven by tariff-induced distortions of economic activity”.

She noted that, in the first quarter of 2025, “importers boosted their inventories in anticipation of higher tariffs”.

If the Eurozone and its many institutions have any real ambition to have a greater say in the global economy, it will need to be far more aggressive and outspoken when faced with the dual threat posed by American hegemony and Chinese industrialisation.

It feels like in her meeting with Donald Trump in Scotland recently, EU Commission President Ursula von der Leyen meekly accepted Trump's proposals. This is not the behaviour of a person or institution which has the ambition to have a seat at the top table of global affairs.

The Euro has seen a gradual erosion of its recent strength so far this week. The publication of the FMC minutes showed that rates in the U.S. are not about to tumble as they have in Europe. It fell to a low of 1.1622 but rallied to close at 1.1651.

Have a great day!