The Two Weeks That Will Be (20th October 2024)
1. The US
As we await to see how Israel will respond to Iran, the clock is ticking down to a new US President. Not that this is apparently of much interest to those trading US Treasuries, even though either winner will be increasing US debt and deficits in the years ahead. According to Bank of America, their clients just aren’t trading this theme, as if politics were somehow either too unpredictable or too inconsequential for them to bother with it:
At the same time, the VIX index remains bid despite the S&P500 hitting record high after record high. We are told this is because of the unpredictable and highly consequential event taking place on 5th November. So either bond investors know something equity players don’t, or this is yet another example of markets burying their head in the sand and assuming a Pavlovian FOMO fully-invested stance offset by a VIX tail risk hedge. None of it bodes well for liquidity as we head into the twilight of the year.
A slip by any policymaker could set off a wobble. Finance ministers and central bank governors will be in Washington all week, starting with the G20 meeting on Thursday and continuing with the IMF/World Bank meetings from Friday. 2. The UK
Andrew Bailey is busy on his travels, giving speeches on Tuesday, Wednesday, Thursday and Saturday at (respectively) the Bloomberg Global Regulatory Forum, the IIF, the CFTC and the G30 Annual International Banking Seminar. It’s almost as if he wants to get a message out before the big event of the following week…
On Wednesday 30th October, the country will experience its first Budget from a Labour Government for fifteen years. Back then, in 2009, Alistair Darling introduced a new top rate of tax, 50% for those earning above £150,000 and abolishing the personal allowance in a taper above £100k, along with an additional Winter Fuel Payment. With Rachel Reeves’ first to act to remove the latter (at least for some pensioners), she must be tempted to introduce something else for those at the top of the income scale. Not doctors, obviously, or any public sector worker. Just aristocrats, as the Sunday Times put it, who hand down their businesses, land and AIM shares through the generations and avoid inheritance tax as they go.
The OBR produce two more forecast rounds before the big day, on 22nd October and 25th October. They will get an update on the current state of the public finances with the release of the PSNBR on Tuesday. Reeves is still busy spending her time dealing with what will sell politically rather than what works economically. The outcome will be The Countdown Budget, with three from the top and two from anywhere else, with tweaks here and there to a plethora of different measures in order to raise revenues whilst retaining political capital. Expect to hear more stories ahead of Budget day like the plan to raise the almighty sum of £100million from scrapping salary sacrifice schemes for electric vehicles.
Such commitment to the basis point of detail shows that Reeves will make the spreadsheet add up but she hopes the real message of the day will be of a government committed to delivering growth through investment. She will likely commit to a ‘golden rule’, Gordon Brown style, for a proportion of GDP that will always be spent on investment. To do so whilst meeting her fiscal rules will require a shift in how debt is measured. Unless it is radical, this is unlikely to perturb Gilt investors. Instead they will be looking at the quantum of expected increased Gilt issuance (is it £20bn or £60bn?) and over what time frame she pledges to meet day-to-day spending from tax revenues. Rather more intangibly, they will want to know if she is credible in what she presents. It’s all very well to say you’ll do x or y and promise the outcome of z but economic life rarely pans out so mechanistically. Her horror at the previous government’s inability to control in-year spending is quite possibly one that will also be visited upon her. What will she do then? Will she tax more? Or borrow more? Or spend less?
The real test, then, comes in the aftermath of Rachel Reeves sitting down after delivering the Budget statement. In the weeks and months that follow, the economy will not pan out as forecast and she will have to make course correction adjustments. Budget day is a chance to set out her values and priorities so that it all makes sense.
And not just to bond markets. There is the small matter of 402 other Labour MPs to manage. As the Labour peer Lord Wood has pointed out, ‘settling on a cross-Cabinet line about what austerity is and is not will not only be crucial for selling the budget, but maintaining Cabinet and Party unity in its aftermath‘.
3. Japan
One country that usually doesn’t have to worry about party unity is Japan. A democracy that has effectively only been controlled by one party for decades will go to the polls on Sunday andthe governing LDP is in trouble. The latest poll by Nikkei Asia suggested they would struggle to gain the 233 seats needed for a majority. A more recent Kyodo News survey showed the gap between the LDP and the main opposition party, CDPJ, narrowing sharply. There are clear parallels between the current situation and the last time the LDP lost power. That was in 2009, in the aftermath of the financial crisis, with an unpopular prime minister struggling with a political scandal. This time around the opposition have struggled to marshal themselves into a cohesive group, with the Japanese electorate just as fragmented as most other economies since the pandemic. This should help the LDP to hold on, this time round.
The Bank of Japan will then leave interest rates unchanged at their meeting on Thursday 31st October. No need for them to rush into their next rate hike until they are clear on the political mood music.
4. The ECB
The ECB is hurrying rapidly to the more dovish side of the boat. Having cut rates again, it will only be a matter of time before they drop reference in their statement to keeping rates ‘sufficiently restrictive’ as they now need them to be actively loose. The latest ECB Survey of Professional Forecasters showed longer term inflation expectations falling, to 2% over five years. Their longer-term growth expectations are at an all-time low:
No wonder Mario Draghi warned in the address to the European Parliament upon presentation of his competitiveness report: ‘Europe’s economies face a choice between paralysis, exit or integration. Exit has been tried and has not delivered what its proponents hoped for. Paralysis is becoming untenable as we slide towards greater anxiety and insecurity. So, integration is our only hope left’.
Lagarde and Lane are both in Washington next week and speak on Tuesday, Wednesday and Thursday. They will have their dovish tin hats on. The German IFO will confirm the gloomy picture on Friday as will European Q3 GDP on Wednesday 30th October.
5. China.
China is pushing on the fabled string with its attempts to stimulate a moribund economy. It’s becoming clear with each disappointing announcement that its policymakers will not be the ones to flood the world with liquidity. The country is facing the reality of getting stuck into a deflationary debt loop. Their Zero Covid policy had its part to play:
Every economy paid the price for the pandemic, whatever their lockdown policy. Some might have avoided a worse fate; others merely delayed the inevitable. But the aftermath of those decisions from 2020 has cast a very long shadow. Creating growth under a huge pile of debt is a problem for a number of large economies across the world.
6. Earnings
Not that the tech giants of the Magnificent Seven are paying the price. Quite the reverse. Buoyed by the technological revolution and the pandemic giving a big shift into the virtual world, a handful of companies are reaping the rewards of their first mover advantage. We are moving into the key weeks of earnings season as we get the latest results from Google on Tuesday 29th October, Microsoft on Wednesday 30th October, and Apple and Amazon on Thursday 31st October. Happy Halloween!
