Hunt Delivers His Package For The UK Economy

Chancellor Jeremy Hunt delivered his much-anticipated Autumn statement yesterday.

With the Tories so far behind in every opinion poll, time will tell if Hunt has delivered a package that pleases both the voting public and turns around this government’s political fortunes and the watching financial markets.

Currency Exchange Rates Update

Against the Euro, the Pound ended last week trading 0.53%. Down on the month and 0.17% down on the year to date.

Versus the US Dollar, the Pound is faring better. Up 2.82% on the month and 5.09% on the year to date.

What’s in the news?In the

In The UK…

Good news

The financial markets think the Bank of England (BoE) will start cutting UK interest rates as early as next spring. This follows the largest fall in the UK inflation rate since 1992.

The ONS (Office for National Statistics) reported that the UK economy defied expectations of a contraction. In September, UK GDP grew by 0.2% month on month. This is against the zero-growth forecast by economists and follows growth of 0.1% in August. This means the UK could avoid a recession this year.

However, evidence from the Lloyds Bank UK Sector Tracker points to staff shortages. This is a persistent issue in sectors where demand remains relatively buoyant or where skills mismatches are most acute. Notably in the software, services, food and beverage and manufacturing sectors.

Britain’s six largest mortgage lenders are now all offering mortgage rates of less than 5% following the latest fall in the rate of inflation.

Business & Trade Secretary Kemi Badenoch signed off the biggest US-UK trade deal so far last week. The $1 trillion pact with Florida will allow the UK to expand business opportunities and is focused on space, semiconductors and emerging industries.?

Badenoch also backed a free-market think tank report that Brexit hasn’t damaged UK-EU trade.

The report by the Institute for Economic Affairs (IEA) said that contrary to initial concerns, Brexit has not had a detrimental impact on UK–EU trade. Economist Catherine McBride said in the IEA paper “Trade data doesn’t support the Office for Budget Responsibility (OBR’s) claims that Brexit has caused significant negative impacts on the UK economy. A false narrative that Brexit has harmed UK trade is now firmly entrenched in the British public psyche. However, this just isn’t true. The vast majority of UK and EU trade is conducted by multinational companies who manage to sell goods all over the world. The UK media somehow assumes these companies are too stupid to cope with some additional EU paperwork.”

The IEA research shows that trade grew between 2016 and 2020. While UK goods exports rose 13.5% to EU nations and 14.3% to non-EU countries between 2019 and 2022. UK services exports rose by 14.8% to EU countries and 22.1% to non-EU countries over the same period. The IEA says this is due to varying demand levels and that UK trade patterns compared to other G7 countries have not changed since Brexit. The Office for Budget Responsibility (OBR) had predicted before Britain’s exit from the single bloc that the UK economy would shrink by about 4% in the long run as a result of Brexit.

The UK has signed an agreement with the US to work together on nuclear fusion. The partnership with the US was announced in Washington by Andrew Bowie, Britain’s minister for nuclear and networks. It means the two countries will share facilities, fund research and build shared supply chains for the complex fuels and other materials needed to achieve fusion.

Mr Bowie said the UK’s ambition was to have a commercial fusion reactor “grid-ready” by 2040. David Turk, deputy undersecretary at the US Department for Energy, said America looked forward to working with the UK “to advance fusion energy to help achieve our countries’ shared goal of ending the climate crisis”.

The City of London skyline will radicallychange in the next 7 years. The City Corporation approved 11 new towers, one of which will be taller than the very tallest current tower. This will add up to the equivalent of 70 football pitches in size or 500,000 square feet of floor space. Together with the 500,000 square feet already in development.

In a QS Best Student Cities poll, Statista reported that London (100) came out first in a poll of the best destinations for international university students. Beating the likes of Munich (97.4), Tokyo (96.1) and Melbourne (95.5).

Not so good news

The ONS reported that London property market rental prices jumped by 6.8% year on year, their biggest rise since 2006 amid a landlord exodus. A cocktail of dwindling supply and rising demand, fuelled largely by landlords selling their homes to offset rising mortgage costs, has pushed up rents.?

Monthly data from the Insolvency Service showed Insolvencies jump by 18% in October as high interest rates squeeze firms. Around 82% of last month’s insolvencies were creditors’ voluntary liquidations (CVLs), where an insolvent company’s directors choose to wind up. The data also showed that the number of insolvencies has hit its highest level since the height of the financial crisis in 2009.

The ONS also reported that consumers cut back on spending by more than expected in September. Retail sales fell by 0.9%.

In The USA…

Like the UK, the timing of interest rate cuts in the US continues to be brought forward. With the Fed (Federal Reserve) expected to start cutting US interest rates as early as next spring. The UBS (Union Bank of Switzerland) expects the Fed to halve interest rates next year. Whilst Morgan Stanley is betting the Fed will start cutting rates in June 2024, then again in September and every meeting from the fourth quarter onward. Each in 0.25% increments whereas Goldman Sachs sees the first 0.25% cut much later in the fourth quarter of 2024. Followed by a 1% cut per quarter through mid-2026.

Like the UK, the US inflation rate slowed significantly in October. With the so-called core consumer price index, which excludes food and energy costs, increasing by just 0.2% from September.

The US Senate gave its overwhelming approval for a temporary funding measure to avert a government shutdown. The measure pushes a partisan clash over federal spending into the new year while also leaving out emergency funding for Israel and Ukraine. That kicks one major political risk for markets down the road.

Treasury Secretary Janet Yellen has hit back at credit ratings agency Moody’s for shifting the US credit rating to a negative outlook. Yellen expressed confidence in the country’s economy and in the safe-haven qualities of Treasury bonds.

The US government deficit and debt interest payments have increased in recent times. Markets will need to absorb an additional $2 trillion of bonds every year for at least the next two years. This is after the Fed moved from years of QE (Quantitative Easing) to QT (Quantitative Tightening). The CBO (Congressional Budget Office) expects the budget deficit to swell to above 5% this year. Then 6% in 2024 and 2025 respectively.

Whilst new buyers in the US housing market are paying 8% mortgage rates, earlier borrowers cling gratefully to loans of less than 3%. A third, even more fortunate group are the rapidly growing number of Americans who own their homes outright. The share of US homes that are mortgage-free jumped by 5% from 2012 to 2022. A record just shy of 40%. More than half of these owners have reached retirement age.

A new monthly poll conducted for the Financial Times and the University of Michigan’s Ross School of Business showed that only 14% of American voters believe they are better off financially now than when Joe Biden took office. What price on a new Trump presidency come election day on the 5th of November 2024. ?

In The EU…

The ECB (European Central Bank) President Christine Lagarde does not expect interest rates to be cut for at least “the next couple of quarters.”

In the past couple of decades, Germany’s leaders have made two big bets. One to depend on China for trade and secondly, to depend on Russia for energy. Neither choice looks very clever at the moment.

German industrial production dropped again in September for the fifth consecutive month. Whilst the construction PMIs hit their lowest point since April 2020. Signalling the health of the construction sector continues to worsen, highlighting the challenge that Europe’s largest economy is facing. Indeed, German construction companies recorded one the fastest rates of decline in work on residential projects since 1999.

To add fuel to the fire, IWH reported that the number of insolvencies in Germany for the month of October were 44% higher than a year ago. This is expected to rise significantly again in the coming months.

In Spain, acting Prime Minister Pedro Sanchez has been asked to form a government following two failed investiture attempts from right-wing opposition leader Alberto Nú?ez Feijóo. Ending a four-month political deadlock following inconclusive general elections in July. Sanchez’s mandate could prove fractious. After he granted numerous concessions in talks with parties from Catalonia, Galicia, the Basque Country, and the Canary Island. The proposed law sparked wide protests across Spain.

In Portugal, PM António Costa has resigned. Just hours after prosecutors issued arrest warrants and raided government buildings in a corruption investigation that reached his inner circle.

Others

Oil prices in the global commodity markets have sunk into ‘bear’ territory amid signs of healthy supplies and rising stockpiles. This is despite attempts by OPEC+ leaders Saudi Arabia and Russia to keep the price decline in check. Crude is on a run of four straight weekly declines, the longest losing streak since May. With West Texas Intermediate dropping more than 20% in value from its September high. Whilst the benchmark Brent crude plunged almost 5% just last Thursday.

Elsewhere, China stepped up its support for the economy by pumping the most cash (1.45 trillion yuan or USD $200 billion) since late 2016 into the financial system with one-year policy loans. This extra support came on the same day the largest bank in the world, the Industrial & Commercial Bank of China Ltd suffering a cyberattack that rendered it unable to process its US Treasury trades. The cyberattack disrupted normal market operations with brokerages and banks forced to reroute their trades.

Despite government support, data from the National Bureau of Statistics (NBS) showed that China resumed consumer price deflation in October. With the headline CPI index falling into a negative territory of -0.2% year on year. This combined with the weak PPI reading indicates persistently weak demand in the world’s second largest economy.

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Quote

This week’s quote comes from British mathematician, philosopher, logician, and public intellectual Bertrand Russell

“The problem with the world is that fools and fanatics are always so certain of themselves, and wiser people so full of doubts.”