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
Alex
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.
Would you like to receive FXD Capital’s Insights directly to your mail inbox? Click the button to subscribe to our email newsletters.
Subscribe to our weekly economic update
This document should be considered a marketing communication for the purposes of the FCA rules. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and it is not subject to any prohibition on dealing ahead of the dissemination of investment research. The information given in this document is for information purposes only and is not a solicitation, or an offer to buy or sell any security or any other investment or banking product. It does not constitute investment, legal, accounting or tax advice, or a representation that any investment or service is suitable or appropriate to your individual circumstances.
You should seek professional advice before making any investment decision. The value of investments and the income from them can fall as well as rise. An investor may not get back the amount of money invested. Past performance is not a reliable indicator of future results. Investment returns may increase or decrease as a result of currency fluctuations.
The facts and opinions expressed are those of the author of the document, as of the date of writing and are liable to change without notice. We do not make any representations as to the accuracy or completeness of the material and do not accept liability for any loss arising from the use hereof. We are under no obligation to ensure that updates to the document are brought to the attention of any recipient of this material. Please note that this commentary may not be reproduced, distributed, disseminated, broadcasted, sold, published or circulated without prior consent from FXD Capital Limited.
FXD Capital Limited is registered in England & Wales (No. 11397216) with its registered office at 3 Lloyds Avenue, London, EC3N 3DS. FXD Markets Limited is registered in England & Wales (No. 11876665). FXD Markets is an FCA registered trading name of Kyte Broking Limited. Kyte Broking Limited registered in England & Wales (No. 02781314) is authorised and regulated by the Financial Conduct Authority (“FCA”) under FRN: 174863 with its registered office at 55 Baker Street, London, W1U 8EW. Kyte Broking Limited is a member of the National Futures Association (“NFA”) under NFA ID: 0288293.