Markets are nervous as the US is no closer to rolling over a government spending deal that expires tonight.

On Wednesday Donald Trump rejected a bipartisan deal that would have rolled over the current budget to the end of March, by urging sitting Republicans to “GET SMART and TOUGH”! Whilst Elon Musk warned “any member of the House or Senate who votes for this outrageous spending bill deserves to be voted out in 2 years!”

Trump has since tried to cobble together a plan that involves a partial continuation of funding as well as an increase in the debt ceiling – which is something that Republicans routinely reject.

Unsurprisingly this has fallen at the first hurdle and now we’re looking at the government shutting down from close of play today.

We’ve been here before and we’ve seen shutdowns and furloughs last for months, but we haven’t seen one this close to Christmas. From a markets perspective this has led to an abrupt end to the Santa Claus rally in stock markets and in the FX space the Dollar is now even stronger.

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Dwindling UK Productivity

Following a Q3 2023 peak, the story exactly a year later paints a different picture - one of continuing weakness. Though the Bank of England had targeted a 0.1% increase on the previous quarter, the actual print showed a 0.8% decrease in productivity - a far bigger economic and political problem.

The ongoing proliferation of UK productivity weakness means that today we sit just 1.3% higher in productivity terms than where we were pre Covid. In the period from the 2008 financial crisis to 2019, the UK’s average year on year productivity was 2%, which shouldn't really feel as unreachable as it does!

In a comparison with our continental counterparts, France and Germany, the UK’s GDP per hour per capita is $13 and $15 dollars lower, respectively.

BoE Pauses

Yesterday, the Bank of England met expectations in maintaining their benchmark interest rate at 4.75%.

While the hold matched forecasts, subsequent price action was driven by three members of the Monetary Policy Committee voting to cut rates 25bps, exceeding expectations that just one member would opt to do so.

Those favouring a cut (Swati Dhingra, Dave Ramsden and Alan Taylor) cited data which indicated sluggish demand and a weakening labour market as key reasons to ease monetary conditions. Nevertheless those favouring a hold pointed to the inflationary impact that higher-than-expected wage growth could have, in addition to recent data which showed a rise in inflation.

Indeed, this week CPI showed signs of rising to 2.6% marking its highest level in eight months while core inflation (at 5.1%) surpassed the BoE’s expectations of 4.9%, indicative of how policy makers see their fight against inflationary as far from concluded.

Here, five telegraphed that a gradual approach to easing rates would be appropriate while one – probably the more hawkish Catherine Mann – suggested that “the evolution of and prospects for disaggregated measures of activity and inflation could warrant an activist strategy.”?