Sunak to announce spending plans
23rd November: Highlights
- Sunak – Second wave bringing enormous economic strain
- Mnuchin Doing his best to undermine Biden
- Activity data to put a lid on the euro?
Public spending slowdown years in the future
It is fairly clear that there will be tax increases at some point in the next two to three years but there will be no return to austerity despite the threat of a public sector wage freeze.
There will be more money provided to the NHS with £3 billion made available immediately to allow it to catch up with procedures delayed by Covid-19 and to replace equipment.
The threat of a pay freeze for the rest of the public sector has raised concerns over industrial action, but as Sunak said, there has been a huge amount of struggle for the private sector over the past nine months and the Government cannot immunise those working for local councils etc.
The spending review will be published on Wednesday, but it is more likely to be the costing of the measures and the amount of additional debt these will create that will interest financial markets.
Sunak was at pains in his interview yesterday to say that beating the virus is the Government’s number one priority and now is not the time to worry about debt levels which are already at peacetime highs.
Prime Minister Boris Johnson will outline to Parliament today the plans for restrictions post-lockdown 2 which ends next week in order to allow the country to enjoy as normal a Christmas as possible.
Sunak confirmed yesterday that shops will be allowed to reopen across the entire retail sector, while how the Holiday Season will be restricted will become clearer later today.
Wednesday will also see the release of an updated economic and fiscal outlook from the Office for Budget Responsibility. This is likely to give a no holds barred view of the economic outlook and will in many ways be more informative than Sunak’s perhaps more optimistic vision.
Last week, the pound continued to gain although it constantly ran into selling pressure. The outcome of Brexit negotiations is expected to be the catalyst which sees it rally above 1.3320 but this week’s economic considerations will also play a part. It rallied to 1.3312, closing at 1.3298 last week continuing a three-week sequence of higher closes.
Treasury curtails spending plans much to Fed’s disgust
This has drawn stinging criticism of Fed Chairman Jerome Powell and has been labelled a clear attempt to cause as much difficulty to the incoming Administration as possible.
Powell will provide testimony on Capitol Hill today and has already agreed to a request from Mnuchin that all unused relief funds be returned to the Treasury by year end.
The spat between the Treasury and Federal Reserve or most exactly Mnuchin and Powell will provide a fairly ignominious end to Mnuchin’s career in the public sector as he likely strives to return to Wall Street.
He has denied trying to sabotage President-elect Biden’s ability to immediately promote Pandemic Support and commented yesterday that his decision was based on the fact that the nine packages were not being fully utilized.
With the High Court in Pennsylvania throwing out the Trump claims over voter fraud and almost ridiculing the writ, it seems that the former President has very little option but to concede and draw a veil over one of the more inglorious periods of recent U.S. domestic history.
The Pandemic is continuing to spread almost without any control as it seems that the production of a vaccine has become the country’s only defence. California announced an after dark curfew yesterday, but as was seen in France this could quickly morph into a full lockdown.
With employment data disappointing the market last week and the threat of a double-dip recession becoming more likely almost daily, it is more than the improvement of risk appetite brought about by the development of a usable vaccine that is driving the dollar index.
Last week it fell to a low of 92.20, closing at 92.37. It is likely that Powell will express his economic concerns today, particularly about the pace of negotiations in Congress regarding a new support package and that may see the dollar break the 92.20 level and test 91.80.
GDP, Consumer Spending and, investor confidence all due
This week there will be a slew of economic data released that with confirm writ large that the Union is heading for a double-dip recession that it won’t be able to exit from quite as easily as it did in Q3.
Later this morning, data for private sector activity will be released with the composite figure for manufacturing and services combined expected to have fallen from 50 in October to a preliminary 46 this month.
Tomorrow, data for the business climate and future expectations for Germany will be published and this is also expected to retreat from recent improvements.
The wrangle between Hungary and Poland on one side and the EU Commission on the other continues with no sign of any compromise. There were riots in Warsaw yesterday over women’s rights which perfectly illustrate both sides of the argument.
The euro has been incredibly resilient in the face of both the Pandemic and the tauper that appears to be affecting the Commission, Council and Parliament as they crawl, at snail’s pace, towards a budget settlement and a Pandemic Relief Fund.
This has, of course, been mostly in reaction to the weakness of the dollar given its major share of the index’s basket. However, with bleak data on the way, a top could have been created last week with a period of weakness on the cards.
A fall from its recent highs would suit the ECB as it continues to express concerns over deflation.
Last week, the single currency rose to a high of 1.1893 which could mark close to its high for the year, particularly since its range also narrowed considerably last week.
About 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.”