UK FISCAL: Headlines from the weekend: More sources on income tax hikes (1/2)
Oct-27 07:11
Last week the Guardian broke the news that income tax hikes were being discussed by the Treasury (although noted that Chancellor Rachel Reeves was still not sure if she wanted to break a manifesto pledge). Some of the weekend news has fleshed out these stories.
- The Sun on Sunday (link here) has run a sourced story that the income tax rise under consideration is 2ppt. This is the top end of expectations - we had expected 1-2ppt to be under discussion. However, it is probably too much to read into this that 2ppt will be the eventual outcome - it would be strange to not at least discuss 2ppt if any income tax raise was under consideration. The article runs with the numbers of around GBP20bln/year additional revenue. This is presumably from a 2ppt increase to both basic rate and higher rate. Based on the Treasury's January estimates a 1ppt increase to basic rate would raise around GBP8.2bln/year and higher rate GBP2.1bln/year.
- The Independent (link here) runs a story on potential increases to the additional rate of income tax - or potentially lowering the threshold where it kicks in (currently just above GBP125k). However, as the story notes there are already kinks in the tax code that make lowering the threshold problematic. At GBP100k the personal allowance is gradually withdrawn, leading to an effective tax rate of 60%. So reduction to GBP110k for example would lead to a marginal tax rate of 67.5%. Alternatively raising the 45% rate by 5ppt would only raise a little more than GBP1bln/year.
- Remember, that we look at the options for income tax, VAT and national insurance increases in our analysis piece here.
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MACRO ANALYSIS: MNI US Macro Weekly: FedSpeak Reaffirms Range Of Cut Views (2/2)
Sep-26 20:16
While we heard the monetary policy views of 6 of 12 current FOMC voters this week, there were no real surprises. We go through all of the relevant FOMC communications in full in our Macro Weekly PDF.
- Chair Powell reiterated that policy is not on a preset course; Gov Bowman and Gov Miran reiterated their more-dovish-than-median views; Musalem and Schmid suggested only limited scope for easing; and Goolsbee eyed neutral rates 100-125bp lower but was “uneasy” with too much front-loading.
- Virtually of the week’s FOMC speakers noted labor market risks had begun to surface, but had varying concerns about inflation. To sum up:
2025 FOMC Voters:
- Powell Reiterates "There Is No Risk-Free Path", Policy Not On Preset Course (Sep 23)
- Gov Bowman: Concerned Will Need Faster And Bigger Cuts (Sep 23)
- St Louis's Musalem: Limited Room For Easing, Policy May Be Close To Neutral (Sep 22)
- Chicago's Goolsbee Eyes Neutral Rates 100-125bp Lower (Sep 23), Uneasy With Too Much Cut Frontloading (Sep 25)
- Gov Miran: Appropriate Rates In 2.00-2.50% "Ballpark" (Sep 22)
- KC Fed's Schmid: Slightly Restrictive Policy The "Right Place To Be" (Sep 24)
Non-2025 Voters:
- Atlanta's Bostic Pencils In No More Cuts this Year, But Watching Data (Sep 22), Longer-Run Dot Suggests Limited Impetus To Cut Further (Sep 23)
- SF's Daly: Likely Further Cuts Will Be Needed To Support Labor Market (Sep 24)
- Cleveland's Hammack: Policy Very Mildly Restrictive, Concerns On More Cuts (Sep 22)
- Dallas's Logan: Time To Move From Fed Funds Policy Rate To Tri-Party Repo (Sep 25)
- Barkin: Jobs Shakier, Inflation Less Troubling (Sep 26)
MACRO ANALYSIS: MNI US Macro Weekly: Too Solid For Comfort (1/2)
Sep-26 20:13
We've just published our US Macro Weekly - Download Full Report Here
- The US economy now appears to be on more solid footing than it seemed a week ago. Versus 45bp in Fed rate reductions through the remainder of 2025 as of last Friday, futures markets now price 40bp. Half of that retracement came Thursday at 0830ET, when Q2 GDP data, initial jobless claims, durable goods orders, and goods trade data all pointed to stronger ongoing GDP growth than previously anticipated.
- Q2 GDP growth was revised up significantly in the 3rd and final reading, to 3.84% Q/Q SAAR from 3.29% in the 2nd reading (consensus had expected this to be unchanged in the 3rd).
- And while that’s in the past, the latest monthly data saw the Atlanta Fed's GDPNow estimate for Q3 jump to 3.9% from 3.3% last week.
- Friday’s PCE data suggested solid consumption dynamics through August (and no nasty surprises in the core inflation data).
- As such, the week’s data almost unambiguously portrayed a better domestic demand story through – and beyond – a volatile first half of the year related to tariff policy shifts.
- That poses something of a quandary for a Fed that has shifted its sights to labor market risks. GDP is not employment, but a case for rate cuts at a time when inflation is still pushing 3% is tougher to make when the economy is growing at close to a 4% real pace and equities remain at or near all-time highs.
- October's cut is no longer such a sure thing as it seemed after the September meeting, with a 25bp ease now priced at 21bp (~84% implied prob), versus closer to 23bp (90+%) at the end of the prior week.
US TSY OPTIONS: BLOCK: Large Nov'25 5Y Risk Reversal, Covered
Sep-26 19:44
- +30,000 FVX5 108.5/109.5 call over risk reversals, 0.5 net vs.
- -18,000 FVZ5 108-31.75 at 1536:10ET
