Macroeconomics: The Day Ahead for 26 November

The UK’s much anticipated Budget takes centre stage today along with the Fed’s Beige Book ahead of its December FOMC meeting. Inflation readings from Australia and Brazil, US weekly Jobless Claims and Durable Goods Orders for September feature on the statistical schedule, while ECB speakers and the run of weekly US energy reports from the EIA and Baker Hughes are all published today ahead of the Thanksgiving holiday, while agricultural bellwether Deere & Co tops the modest run of earnings.

** U.K. – Budget **

– The weekend announcement of a freeze on increases for most UK rail fares is a statement of intent on optically lowering elements of non-discretionary cost of living, which will help to drive down CPI below target next year, and is an obvious pitch to boost the government’s popularity. However it will likely prompt rail companies to pursue a hardline on salary increases, which will almost certainly prompt strikes, given the rail sector unions are among the most militant. UK rail fares are in any case among the most punitive in the whole of Europe and will remain so even with a temporary freeze. Having ditched their original plans to hike income tax rates, the question then is how Starmer and Reeves will increase their fiscal headroom to around an expected £20 bln (vs. current £9.9 Bln). The freezing of income tax band thresholds will likely be extended beyond 2027 to 2029, which does not immediately impact taxpayers, but will continue to drag more and more individuals into higher tax bands and continue to pressure household incomes. There is also a lot of chatter about some form of banking tax, though this runs in the opposite direction of the government’s push to roll back some of the post-GFC banking regulations. There has also been a lot of talk about a wealth tax, one element of which might be to increase council tax rates for properties in the highest value bands (G and H), but doing this without a very long overdue reform of valuations (still set at 1991 rates) will likely create a popular backlash, and a host of problems for local councils. Caps on ‘salary sacrifice’ schemes for pension contributions have also been bandied around, but this would likely create a lot of problems in future, as private pensions saving would likely be hit hard. The other big question is where spending cuts might be made, above all investment spending, which since World War II has been a frequent victim when governments have run up against fiscal problems but has left UK infrastructure in a woeful state (though this is also true in many countries in Europe and North America). But the real test for Reeves and Starmer will be reaction in the days and weeks after the Budget, both public and above all the left wing of the ruling Labour party, which in turn will decide how much longer they can retain their current positions.

** U.S.A. – Fed Beige Book **

– Given the dearth of timely US official statistics, today’s Beige Book will garner rather more attention than usual in terms of taking the temperature of the US economy, above all on growth, inflation and labour demand. Yesterday’s weaker than expected Retail Sales and lower than forecast core PPI accompanied the sharper than anticipated fall in Consumer Confidence all served to bolster hopes of a December Fed rate cut. However the details of Consumer Confidence were worth close inspection, given that there was no material deterioration in the Labour Differential (Jobs Hard to Get edged lower) or expected job availability, while inflation expectations were unchanged (though still quite high), the big drag cam from 6-month Income expectations, and across the board on major purchases intentions. Per se the headline fall was rather more dramatic than the details would suggest, and varied enormously across the regions, and looked to be heavily influenced by political viewpoints in the aftermath of Election Tuesday, and may not be viewed as significant by many FOMC members.