5 March 2024: Hunt plans some innovative measures


  • Labour is already “hedging their bets”
  • The confluence of tax and inflation has reached a crucial point
  • The comments following Thursday’s ECB meeting may be a “watershed”
GBP – Market Commentary

Business class flight tax to add to company costs

Chancellor of the Exchequer, Jeremy Hunt, is reportedly considering some innovative measures in his budget, which he is due to deliver tomorrow. One of the actions he is believed to introduce is a higher tax rate on company use of business-class seats on air travel.

While such a measure will not be a massive revenue earner for the Treasury, it will set the tone for the levelling up that the Government is trying to achieve.

There will be the Budget “staples” of tax increases on tobacco and alcohol, but the real “headline-grabber” will be what changes are made to the taxation of companies and individuals. Hunt is expected to match his Opposition counterpart in pledging not to raise Corporation Tax should his Party win the next election, while several of his colleagues have called for it to be cut.

On personal taxation, Hunt has promised that any cuts will be “prudent and affordable”.

The City and the Bank of England are preparing for a moderately inflationary Budget. This may cause the Bank to delay the introduction of interest rate cuts by as much as a quarter, but such a trade-off should allow the country to begin to recover from the mild recession it dipped into at the end of last year.

Overall, Hunt is faced with a stark choice; be bold and save a few Conservative seats at the Election or play it safe and stick to the plan that the Prime Minister has been referring to in speeches recently.

In a speech made yesterday, Rachel Reeves, the Shadow Chancellor, admitted that it will take “years” to reverse the damage of fourteen years of Conservative Party Government. Yet again, she was unable to be specific about the measures she plans to introduce or where the funding will be derived from.

There is a possibility that Hunt will remove the controversial non-dom residency status for foreign nationals that allows them only to pay tax on earnings that are made in the UK while living in the country all year round.

This has always been considered a “curious loophole” since it appears to have no basis other than to allow the rich (such as the Prime Minister’s wife” to pay less tax.

Labour has pledged to close the loophole and Hunt may yet “steal their thunder”.

As the market awaits the Budget, Sterling is still in a fairly narrow range. Yesterday, it rallied close to its short-term level of resistance reaching 1.2706 but was unable to cling on to gains and fell back to close at 1.2689.

USD – Market Commentary

The FOMC would like headline NFP data to fall below 100k

The past two releases of headline new job creation have been more akin to a nation that will need to consider interest rate rises rather than cuts going forward, as they portray an economy that is coming close to “overheating” rather than considering a soft landing.

Employment is one of the main reasons that Jerome Powell is adamant that there is “no rush” for rate cuts to be introduced until employment figures “moderate”. If the FOMC voted to cut rates at its upcoming meeting, they may add more stimulation than the economy could absorb, leading to inflation.

There is a point in every economic cycle where there is an inflexion point at which monetary policy reaches the optimum level where growth and inflation “equal”.

While it is not described as such in economics textbooks, this is the point at which a soft landing can be declared.

This “Goldilocks” scenario, where the economy is not “too hot”, nor “too cold”, is pretty much where the country is right now.

In a week that will see several crucial data releases, Jerome Powell will also be testifying before both Houses of Congress, providing his assessment of the economy over both the past six months and what he predicts for the next half year.

He will be held to account by Congressmen about any differences between his last testimony and what happened, although there have been few errors in judgment.

Powell finds himself in the curious position of being a “card-carrying” member of the Republican Party, appointed by a Republican President who is serving a Democrat Administration. This should afford him a little leeway on Capitol Hill, but over the past three and a half years he has met with hostility from both sides of “the aisle”.

Today will see the publication of output data for February, with services and composite activity expected to have moderated slightly. Services PMI is expected to fall from 53.4 to 53.3 while the composite index of services and manufacturing still reflects the sluggish nature of manufacturing output, although it is still in positive territory, falling to 51.3 from 51.4.

The dollar index reflects the market’s view that the employment report will show a slowdown in job creation in February. It fell to a low of 103.72 yesterday and closed at 103.83.

EUR – Market Commentary

Eurozone nations’ cost of borrowing is falling

The ECB and members of its Governing Council are still searching for confirmation that inflation is genuinely on a downward trajectory, and a cut in rates won’t disturb the fragile equilibrium that the current level of rates has created.

That equilibrium unfortunately doesn’t stretch as far as activity, which for the Eurozone as a whole may have driven the economy into a recession in the fourth quarter of last year.

Even if the region reports no growth for the fourth quarter of 2023 meaning that it escapes a recession by the thinnest of margins, the ECB must be close to cutting interest rates, even if wage growth in the first quarter is still outpacing inflation.

Inflation has fallen, and continues to fall, in several Eurozone member states, even if the overall rate remains “sticky”. Those states are being “punished” for the discipline they have shown by not countering tighter monetary policy by loosening fiscal policy.

The interest rates that Eurozone Governments are being charged to borrow funds in the medium and long term have been edging lower as the market looks forward to this week’s ECB rate-setting meeting.

Although it is very unlikely that rates will be cut, a more moderate tone is expected from Christine Lagarde in her post-meeting press conference.

Traders and economists believe that Lagarde will have no reason to show any hawkish tendencies, with inflation falling close to the ECB’s target of 2%. They consider the wait for first-quarter wage growth before cutting rates to be a “red herring”.

The ECB has now had more than enough time to allow the rate hikes that ended in September to work their way through into the entire economy and since wage growth always lags a fall in inflation, it is now time for the economy to see the stimulation it would receive from a cut in rates.

The Euro has been gaining ground due to the belief that the ECB will be the last of the G7 Central Banks to cut interest rates. Yesterday, it rallied to a high of 1.0866 and closed at 1.0855. There is sure to be selling pressure from traders and investors on any approach to the 1.09 level until the ECB provides more clarity about its intentions.

Have a great day!

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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.