9 September 2025: The Budget is already causing anxiety

The fallout from Angela Rayner’s fall from grace may well run deeper and bring further issues for the Prime Minister, which will make the threatened backbench rebellion over welfare reform seem like a storm in a teacup.

Labour's left wing, which is mostly controlled by the Trades Union Congress, is concerned that Rayner’s flagship policy on workers’ rights will be watered down and eventually become little more than a “nice to have” rather than the cornerstone of Labour’s employment policy.

Employers are relieved that the bill outlining the headlines could be delayed, which may well see the whole matter driven further down the Government's list of priorities without a senior member of the Cabinet driving it forward.

The Confederation of British Industry sees the Bill as piling a further burden on the businesses, which are still trying to cope with Brexit and the tax increases that happened in last year’s budget.

Their worries have been magnified by concerns over what will be contained within this year’s budget, which is now less than two months away. The Chancellor, despite her protestations to the contrary, has been “testing the water” around several fundraising options as she tries to fill a £40 billion black hole in the country’s finances.

Even Rachel Reeves must see the irony in her trying to hide the issue when she was shouting from the rooftops about what she inherited a year ago.

It is one of the unwritten rules of British politics that a Prime Minister who recruits an economic adviser to their own staff is committing a grave error, creating strife with the Chancellor, their next-door neighbour on Downing Street.

So when Sir Keir Starmer did just that last week, past examples were dusted off and paraded as cautionary tales. Margaret Thatcher’s appointment of Alan Walters so infuriated her chancellor, Nigel Lawson, that he quit, hastening her own departure a year later.

Tony Blair’s invitation to Derek Scott to join his team was a shot across the bow of frenemy Gordon Brown, but it was the adviser who eventually walked after being constantly undermined.

Starmer has appointed not one but three economic experts to his No. 10 team. Darren Jones, Reeves’ former deputy, took on a newly created role as chief secretary to the Prime Minister, Treasury mandarin Dan York-Smith becomes the PM’s principal private secretary, and former Bank of England deputy governor Minouche Shafik will serve as his economic adviser.

A Chancellor with less “stickability” and faith in their own talents may well have walked already.

Sterling rose further on Monday, extending another 0.35% to recapture territory north of 1.3550. It closed at 1.3520 as it continues its push towards its one-year high at 1.3733.

The importance of the release of the latest inflation data cannot be overstated. The Federal Reserve is facing ever-increasing pressure to cut interest rates, and the data may well prompt Jerome Powell and his associates on the Federal Open Market Committee to continue to delay what feels like the inevitable.

The entire makeup of the FOMC will be significantly changed right up until Powell’s scheduled departure next May, but in the meantime, as the balance of risks between growth and inflation changes, it may be time for a rate cut, with the market driven by the August employment data to consider the size of the cut.

It would be a bold move, particularly as far as economists are concerned, to cut rates by fifty basis points. This would possibly see a period of stagflation ushered in, even if it led to a marginal improvement in GDP.

The prospect of a rate cut next week and the possibility that inflation may have remained above 3% last month have driven the gold price to an all-time high. An ounce of gold rose to a high of $3614.24.

The continued slump in job creation may well tip the balance for the Fed at its meeting next week.

Several economists have warned that, despite the data, layoffs have not begun yet, which would characterise an economy that is falling into recession. Warnings continue to be issued about the Fed being rushed into an ill-thought-out decision driven by political pressure. Furthermore, projected changes to immigration policies are anticipated to constrain the supply of workers in the future, potentially complicating the recovery process.

The U.S. job market has gone from healthy to lethargic during President Donald Trump’s first seven months back in the White House, as hiring has collapsed and inflation has started to climb once again as his tariffs take hold.

The NFP data exposed the widening gap between the booming economy Trump promised and the more anaemic reality of what he’s managed to deliver so far. The White House prides itself on operating at a breakneck speed, but it’s now asking the American people for patience, with Trump saying better job numbers might be a year away.

“We’re going to win like you’ve never seen,” Trump said last Friday. “Wait until these factories start to open up that are being built all over the country, you’re going to see things happen in this country that nobody expects.” That last comment may be construed in two ways as the economy continues to tilt towards a slowdown, if not a recession.

Fed Independence is now a topic for the popular press in the U.S. and not limited to the financial pages.

By and large, the public feels that Jerome Powell, while not as dynamic as either Greenspan or Bernanke, has done a good job as Fed Chair, bringing a more people-friendly face to the role.

He explains his action in a way that the “man in the street” can understand, which has drawn back the veil that often surrounds Wall Street.

There are fears that his successor will be a Trump appointee, but it must be hoped that Congress won’t allow itself to be bullied into allowing a puppet to be appointed to possibly the second most powerful job in America.

The dollar index closed at 97.42 yesterday as traders prepared themselves for the inflation data and a rate cut from the Fed.

President Emmanuel Macron must name a new prime minister after François Bayrou's confidence vote backfired, although it does seem the real blame lies with the President, as the country remains heavily split between the hard left and hard right.

The Leader of the Left, Jean-Luc Mélenchon, is using the proposal to cut two days from France’s national holidays as a platform to fight against any changes to the country’s over-generous welfare state, while Marine Le Pen remains convinced that immigration policy has set France on a road to eventual economic collapse.

Legislators toppled France's government in a confidence vote on Monday, a new crisis for Europe's second-largest economy that obliges President Emmanuel Macron to search for a fourth prime minister in 12 months.

Prime Minister François Bayrou was ousted overwhelmingly in a 364-194 vote against him.

Bayrou paid the price for what appeared to be a staggering political miscalculation, gambling that lawmakers would back his view that France must slash public spending to rein in its debts.

Instead, they seized on the vote that Bayrou called to gang up against the 74-year-old centrist who was appointed by Macron last December.

The demise of Bayrou's short-lived minority government, now constitutionally obliged to submit its resignation after just under nine months in office, heralds renewed uncertainty and a risk of prolonged legislative deadlock for France as it wrestles with pressing challenges, including budget difficulties and, internationally, wars in Ukraine and Gaza and the shifting priorities of U.S. President Donald Trump.

French influence overseas has waned during Macron's term as President, although the issues stem from the country’s dire financial position. Where will the funds come from to support an increase in the NATO budget that France has committed to, while the assistance that has been pledged for both a peacekeeping force in Ukraine, when peace is eventually found, and stopping small boats crossing the Channel will be almost impossible to deliver.

Domestically, 47-year-old President Macron’s ambitions are increasingly facing ruin. The root of this latest government collapse was his stunning decision to dissolve the National Assembly in June 2024, triggering a legislative election that the French leader hoped would strengthen the hand of his pro-European centrist alliance.

But the gamble backfired, producing a splintered legislature with no dominant political bloc in power for the first time in France's modern republic.

Without a workable majority, Macron's minority governments have since lurched from crisis to crisis, surviving on the whim of opposing political blocs on the left and far right that lack enough seats to govern themselves. Still, they can, when they team up, topple Macron's choices.

Bayrou, too, rolled the dice by calling the confidence vote, a decision that quickly backfired on the political veteran as left-wing and far-right legislators seized the opportunity to oust him, seeking to increase pressure on Macron.

Arguing for sharp cuts to repair public finances, Bayrou had proposed to slash 44 billion euros in spending in 2026, after France's deficit hit 5.8 per cent of GDP last year, far above the official EU target of three per cent.

Speaking in the National Assembly, Bayrou painted a dramatic picture of France becoming beholden to foreign creditors and addicted to living beyond its means — problems that he warned would outlast his government without remedial action.

With the Eurozone’s two largest economies in economic and political turmoil, the European Commission must stand up and provide a high degree of support, if the entire region is not to collapse into chaos.

German exports unexpectedly fell in July on a sharp decline in U.S. demand due to Washington's tariffs on European imports, official data showed on Monday, while a survey indicated that investor morale has plunged this month.

Exports from Europe's biggest economy fell by 0.6% in July from the previous month, data from the federal statistics office showed. A Reuters poll had forecast a 0.1% increase.

Spain and Italy, the next two largest Eurozone economies, are doing well in relative terms, but do not have the economic power to drive the region forward while the rest of the region looks on, fearing for the future without the support of Germany, which has proven to be vital in the past.

The euro has established a base above 1.17, which has provided stubborn resistance all summer. Increasingly, the Euro’s “castle appears to be built on sand” with investors still shying away from any long-term commitments.

Have a great day!