Post Budget Bounce or Blues?

Post Budget Bounce or Blues?

Labour’s first budget in 14 years finally answered weeks of speculation about what taxes would rise.? Most households won’t feel the directimpact of the large tax rises announced, so will consumer confidence rebound? Elsewhere, the Eurozone is experiencing mixed fortunes, with modest growth driven by Spain and France, but rising inflation stirs worries about stagnation. Across the pond, the US economy is growing, fuelled by strong consumer spending, yet job growth took a hit with just 12,000 new positions added last month.

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What’s the latest in the UK?

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More, more, more! The new UK Government’s first budget delivered more tax, more spending and more borrowing.? But will it deliver more growth? If you missed our full summary of the Budget you can find it here. Most households won’t feel a big direct impact from the tax changes in the Budget, because its employers who will see their National Insurance contributions rise.? But the Institute for Fiscal Studies calculates that when these measures are fully reflected in wage rates and prices it will have reduced the average household’s income by just under ￡500. Meanwhile the bond markets have been making their assessment and it looks like they’re expecting more inflation because market prices now imply that the Bank of England will cut interest rates more slowly than it had assumed pre-budget, by 25bps or so. The Monetary Policy Committee gets its chance to respond this week. Read more here.

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September’s BoE Money and Credit release presents mixed signals ahead of the Autumn Budget. The housing market shows promising signs of recovery, with mortgage approvals reaching a two-year high of 65,600 in response to declining interest rates. However, caution persists as household savings rates remain elevated, continuing trends from the first half of '24. Consumer credit is trending flatly, with a slight decline in September. On the business front, commercial deposits show a modest downward trend, reflecting ongoing pressures, while firm borrowing remains subdued, possibly due to pre-budget jitters. Following the Autumn Budget, market reactions have been mixed, with businesses expressing concerns about the extent of the tax burden. Future adjustments in consumer and business borrowing and savings remain uncertain in the coming months. Read more here.

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House-price growth slowed in October, with the Nationwide index showing a 0.1% month-on-month increase, below expectations. Year-over-year growth dropped to 2.4% from 3.2% in September, reflecting a 'wait-and-see' approach among buyers due to uncertainty surrounding the recent Budget. Despite weaker short-term demand, falling borrowing costs have provided some support for prices, which rose 0.6% over three months. Forward-looking indicators?suggest potential acceleration in house-price inflation, with expectations rising to 6% year-over-year. The outlook remains optimistic for falling mortgage rates and improved affordability. Read more here.

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What’s the latest in the Eurozone?

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The Eurozone economy expanded by a better-than-expected 0.4% in the third quarter; beating 0.3% and 0.2% growth rates in Q1 and Q2. That’s 0.2pts stronger than the ECB anticipated. But it won’t entirely allay stagnation fears. Business confidence remains weak, especially amongst industrial producers. And growth is highly uneven. Spain is on track to be the world’s fastest growing large economy in 2024: expanding 0.8% in Q3; leaving output up 3.4% y/y. Boosted by the Paris Olympics, France achieved decent (0.4%) growth too. But nearly half – 6 of 13 – of Eurozone economies are actually smaller than Q3’23. Italy flatlined in Q3. Meanwhile Germany failed to recover fully from a 0.3% Q2 contraction, managing just 0.2% growth. Read more here.

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Inflation up and unemployment flat in the eurozone. Budget jitters aside, lenders to governments were a little spooked in several countries last week, including in the eurozone (EZ), where inflation is expected to be slightly higher than expected at 2%y/y in October. The waning impact of falling energy inflation (down -4.6% vs -6.1% in September) was met with services inflation which refused to fall (stable at 3.9%). Unemployment for the EZ in September also remained unmoved at 6.3%. Together this was probably enough to cause investors to reflect on how quickly the European Central Bank will in fact cut rates. Not reconsider mind. Just to reflect. Read more here and here.

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What’s the latest in US?

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Successful soft landing or warning signs? US GDP grew by 2.8% in Q3, falling marginally short of the 3% market forecast and revealing a likely concerning reliance on consumer spending. Accounting for 90% of the uplift, consumption of goods and services surged by 6% and 3% respectively, holistically representing the greatest rise in consumer spending since Q1 2023 and masking significant declines in investment in residential and non-residential structures. Looking ahead, this growth in consumer spending is expected to fall as excess savings accrued through employment growth and fiscal support are depleted, with Q4 growth widely forecast to signal a significant slowdown. Markets exhibited little reaction, prevailing with strong expectations of a 25bps rate cut next week. Read more here.

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US inflation remains a little on the high side relative to target with the Fed’s preferred measure holding steady at 2.7% in September, while month-to-month prices rose 0.3% - the most since April. Spending, meanwhile, was also solid, rising 0.5% on the month, supported by decent income growth a little less saving. It’s all contributing to a shift in sentiment toward the US economy (last week’s labour market data notwithstanding). Having spent much of the summer disappointing, US economic data is surprising in a positive direction again. The result?? A more gradual path for rate cuts. A month ago markets had seven cuts priced in by next September. That’s now down to four, with forecasters and markets unanimous that one is coming this week. Read more here.

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Hurricanes and strikes dampen hiring, but unemployment holds steady.October’s US jobs report showed an increase of just 12,000 jobs, substantially below the projected 100,000 and the lowest gain under Biden. Hiring was disrupted by Hurricanes Helene and Milton, as well as the ongoing strike at Boeing. Despite these setbacks, the labour market displayed resilience, with the unemployment rate remaining stable at 4.1%. However, downward revisions to prior months’ data revealed a broader slowdown in job growth. Wage gains continued moderately, aligning with market expectations of a potential Federal Reserve rate cut to support the cooling economy. Read more here.