Your weekly economic update from the team at FXD Capital
UK Chancellor Rishi Sunak’s Autumn budget was surprising on several levels. Expectations were for further pain from tax increases painted against a backdrop of austerity, but in the end, the budget presented was broadly expansive. Unexpected breathing space was provided by the economy beating various OBR projections for the year; with it on course for 6.5% growth as a whole, the better-than-expected performance unlocks more projected tax receipts to the government’s spending forecasts.
The budget was a mish-mash of targeted policy, like simplified alcohol taxes, away from headline figures of spending for public bodies and healthcare. However, the rhetoric from Sunak did hint at libertarian dreams of smaller government and more responsible spending. In 2022, new corporate tax and national insurance increases will come into play, so the Autumn statement was devoid of significant tax developments.
Gilts enjoyed their biggest rally since March 2020 on news that government debt sales would be £60bn less than expected in 2021. Ten-tear yields fell 0.13% (to 0.98%) as prices rallied, responding to lower-than-expected supply levels from the reduced issuance. The news is an interesting portend to any commencement of tapering of quantitative easing, with the BoE already holding £845bn of Gilts on its balance sheet. UK news travelled far, with ten-year USTs reciprocating, by dropping 0.07% to 1.54%.
UK mortgage lenders are jumping the gun and increasing rates pre-emptively on fixed-rate deals. Over the past two weeks, all the major high street banks raised rates, despite the BoE base rate remaining unchanged. Expectations are for the base rate to hit 1.25% by the end of next year, and lenders are eager to get on board and start earning more margin. If base rates increase by the expected amount and mortgage owners are passed on the total cost, monthly payments could rise by ~20% for borrowers.
Global markets continued with the general October good vibes, despite the month being traditional for historic correctional events. US equity indices touched upon new highs, even as earnings season started presenting disappointments, such as Amazon and Apple missing earnings and revenue forecasts, respectively. Shipping and supply chain issues continue to reverberate around markets, with the inflationary effects gradually being recognised at the checkout. US economic growth itself also disappointed, with Q3 figures slowing down to 2% growth on an annualised basis, the weakest QoQ print since the Covid recession. Pundits predicted 2.7%, and I was surprised that markets didn’t respond too negatively to the wide miss. With stimulus cheques long cashed, supply chain issues and a manic labour market, it seems plausible to suggest that future economic growth may flatline in the States as the economy reaches total capacity.
The ECB held its latest governing council meeting on Thursday, with inflation being the front and centre theme. With other central banks offering more direct guidance on rate changes, the ECB is still quite behind the curve, with markets only pricing in a 0.1% increase in the next year. Inflation in the eurozone is at generational highs in Germany (4.6%) and Spain (5.5%), but the central bank seems to be cautiously waiting to see how things transpire over the coming months.
In other news, the Bank of Canada alarmed markets by inadvertently ending its asset purchase program sooner than expected. Central rates remain at 0.25% but are forecasted to hit 2% by the third quarter of 2022. As a commodity exporter, Canada is in the crosshairs of seeing inflationary impacts on all sides of the value chain. Investors responded to the news by piling out of Canadian debt, with the two-year mark alone increasing by 0.19% to 1.06%.
Brazil also raised rates in one go by 1.75% to 7.75%, the most significant shift in two decades. Inflation is rampant in Brazil, a country of massive economic inequality and geographical logistical challenges, exacerbated by current supply chain events.
Next week the Federal Reserve and Bank of England both convene for their next meetings. So I expect that by this time next week, there will be more exact sentiment on any upcoming changes and how scenarios will transpire in 2022.
All the best for the week ahead
Our weekly column is written by Alex Graham, Economic Advisor to FXD Capital. Originally a bank treasurer, Alex’s weekly roundup intends to provide a conversational, top-down view of what is going on in world macroeconomics and how it impacts business on the ground level.
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