Alcohol and fuel duties lowered while it pays to work begins

The opposition Labour Party have had an easy time in criticizing the Government’s performance since the start of the Pandemic. Boris Johnson and his team have made some high-profile errors in some areas, and not acted fast enough in others.

One Minster who has been fairly secure in his role, and has stood up to some of Johnson’s excesses, is Chancellor Rishi Sunak. While some may say that his role has been fairly simple since he took over from Sajid Javid at the start of the Pandemic, he has targeted the right sectors for support and while generous, cannot be labelled profligate.

Yesterday, Sunak presented his Budget to the House of Commons, although in truth, most of the juicier proposals had been in the public domain as long as six weeks.

One new proposal that the Labour Party will find difficult to criticize when the debate on the Budget begins later today is how the Government is planning to fight hardcore unemployment.

Having faced questions over the withdrawal of £20 per week additional payment of the Universal Credit benefit, Sunak has, in basic terms, used the funds to increase the rate of pay for the lowest paid.

The minimum wage has been increased from £8.91 per hour to £9.50. This may appear to be a small increase, but in real terms it begins to send out the message, it is better to work.

The lower paid will also benefit from the taper of Universal Credit payments to those in work. This means a drop from 63% to 55% in the amount of benefit that is lost when earnings are considered.

The rate of inflation is expected to remain above 4% according to data provided by Office for Budget Responsibility (OBR). The country’s debt to GDP ratio has been cut from March’s estimate of 97.1% to 85.7%., While GDP is expected to return to pre-covid levels by the turn of the year.

The OBR has increased its GDP estimates for this year and for 2023 while it still expects a tough year in 2022, It has reduced its estimate for GDP from 7.3% to 6% with inflation remaining a major issue.

The reaction of the pound was, in the end, fairly muted. It rose to a high of 1.3784 versus the dollar but fell back to close at 1.3731.

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GDP, FOMC and then NFP, acronym time has arrived

The first preliminary estimate for growth in the third quarter will be released later today, and everyone from investors to the White House are bracing for it to have more than halved since the period between April and June.

Following a rise of 6.7% in the second quarter, the initial estimate is for GDP to have grown by just 2.7% in Q3.

There are several factors at play that have grown worse. The most prominent of these are shortages of raw materials, spare parts, and labour.

The U.S. is suffering from a skills shortage and labour force which has become much less mobile.

Once the bad news has been delivered, the market’s attention will turn to next week’s Federal Open Market Committee meeting. It seems like a very long time since the Committee met, although its members haven’t been shy in voicing their opinions.

While it often doesn’t pay to second guess the FOMC, it is fairly certain that the beginning of the reduction in additional support will be announced.

Major efforts have been made by Chairman Jerome Powell, in particular, to make the distinction between the withdrawal of additional support and the raising of short-term interest rates.

Powell believes that the economy is some way away from the need to hike rates, but it is far from certain that the withdrawal of support will support a reduction in inflation.

The Fed is still in uncharted territory, despite having access to some of the most advanced modelling software ever created.

When trying to model a scenario with so many moving parts, and a human element, it can become almost impossible to predict an accurate outcome and the margin for error can be as high as 25%.

Then, once the Fed has pronounced, the market will have to adjust itself into NFP mode. This data is a classic example of a high margin for error. If the data from the previous month is disappointing, there is an almost immediate cry, usually from those who got it wrong, that there is sure to be a significant upwards adjustment the following month.

That is definitely what is expected on November 5th, with expectation that the headline will be around 400k new jobs within a revision from 194k to upwards of 300k in the September headline.

Since its recent correction, the dollar has been, to a large extent, treading water. Yesterday, it rallied to 94.00, another lower high, and closed ten pips lower at 94.85.

ECB unlikely to change course

Having fought so hard to bring the Governing Council of the ECB into line and to be less infatuated with inflation, President of the Central Bank, Christine Lagarde, is unlikely to countenance any backsliding.

Everyone is well aware that long-term inflation is about to break through the 2% level, something that hasn’t happened for a considerable time, but it seems that Lagarde is prepared to answer, so what?

In order for the euro to be considered as a potential replacement for the dollar, although such thoughts are still well into the future, the Central bank must be considered far more flexible.

That means not running for the big guns every time inflation ticks higher, particularly if its origins able to be traced back to a single or even a multiple of temporary events.

As mentioned above, it doesn’t pay to second guess a Central Bank outcome, so to second guess two in a week is almost unheard of, but here goes.

The ECB will certainly leave both the support it provides to the economy and short-term interest rates unchanged. That is the easy part. Now to advance guidance,

Given the way the economy has bounced back, there’s a chance, however small, that there may be a shortening announced to the period over which the current level of support is needed. That may be seen as a nod to the views of the more hawkish members of the Council.

Once the current crisis is considered at an end, it is expected that Lagarde will push for a more manageable body, with members joining and departing at regular intervals. That is the system operated by the Federal Reserve, although given the status of the Heads of the Various Central Banks, means they may expect to have a finger in every pie.

Yesterday, the euro was trapped between two technical levels. It rose to a high of 1.1626 but, again, ran out of steam. It also tested the bottom of its recent narrow range, making a low of 1.1584, but it managed to claw its way back above 1.1600 to close at 1.1604.