UK FISCAL: VAT increase impacts on fiscal, CPI, monetary policy (1/2)
Sep-29 08:40
- Chancellor Reeves seemed to commit a little more firmly against a VAT rise this morning in her Sky News interview (we will be watching closely her language at the Labour party conference where she is due to speak at midday - but probably with a more friendly audience).
- In terms of the fiscal revenues, the Treasury's illustrative effects of a change indicate that a 1ppt increase in VAT would raise GBP8.8bln in 2026/27, GBP9.2bln in 27/28 and GBP9.55bln in 28/29.
- As we noted last week, although the natural response is to think of VAT as a retail tax, it is much broader than that, also applying to hospitality and construction as well as across a number of other sectors.
- Looking at the impact on CPI, the standard rate of VAT is not paid on "essential" goods or household energy. It does apply to vehicular fuels (although this could be offset by a VED reduction) and also does apply to non-essential foods (confectionary, crisps, ice cream) as well as mineral waters and soft drinks.
- We estimate that around 60% of that CPI basket would be directly impacted by a VAT increase. So a 1ppt increase in VAT from 20% to 21% would increase headline inflation by around 0.5ppt if fully passed through.
- The last increase in VAT was implemented in January 2011 (2.5ppt increase from 17.5% to 20%). The timing of this - just after the Global Financial Crisis - makes it hard to use this as a basis for comparison (and VAT eligibility has changed somewhat since then too) but we note that Y/Y CPI rose from 3.26% in October 2010 to 4.35% by February 2011 (an increase of 1.09ppt), and continued to rise to a peak of 5.18% in September 2011.
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RATINGS: S&P Upgrades Portugal To A+ From A
Aug-29 20:28
S&P has upgraded Portugal's long-term credit rating to A+ from A, with a stable outlook (had been positive).
- This is the 7th S&P upgrade for Portugal, from a low of BB in 2012-15. Only four ratings are higher (AA-, AA, AA+, AAA). This is the same rating as Slovakia, and just above Spain (A) per S&P.
- Per Bloomberg: "*S&PGR UPGRADES PORTUGAL TO 'A+' ON LOWER DEBT; OUTLOOK STABLE"
STIR: Still Eyeing September And December Cuts
Aug-29 20:16
With few market-moving data points this week, implied Fed rate cuts essentially held onto their post-Jackson Hole upward repricing, adding a couple of basis points of easing for good measure heading into the Labor day weekend.
- Indeed, the lack of movement is somewhat remarkable given this week's extraordinary "firing" of Fed Governor Cook, which is currently being fought out in the courts. In all it probably added to the dovish tone on the near-term rate outlook post-Jackson Hole but not substantially so, at least so far.
- The current path sees a September rate cut priced with nearly 90% implied probability, with 56bp of cuts through end-year (a cumulatively priced second cut in December) and 83bp through March 2026 (3+ cuts).
MACRO ANALYSIS: MNI US Macro Weekly: One Week, Two Labor Days
Aug-29 20:10
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- A busy pre-holiday week for data brought mixed economic signals and little net change in Fed easing expectations, putting next week’s labor day – Friday with its nonfarm payrolls report, of course, with apologies to Monday’s federal holiday – in focus for the FOMC and market participants alike.
- Second-quarter GDP was revised up by more than expected in the second reading, to 3.3% Q/Q SAAR, driven by better-than-previously estimated domestic demand but still leaving 1st half growth in slightly weaker territory vs last year. That said, the Atlanta Fed's Q3 GDPNow estimate jumped to 3.47% (though the implied contribution from net exports in the quarter looks somewhat dubious, as we explain).
- The other major release of the week was July's Personal Income and Outlays report, which showed a modest uptick in income and spending on the month. However, the broader trends remain mixed at best, as real disposable income growth remains soft and services consumption is failing to regain traction.
- Core PCE inflation was close to expectations in July as the Y/Y accelerated to 2.9% for its fastest since February as it moves further away from recent lows of 2.6% having stalled above the 2% target. Recent trend rates are a little hotter but the median FOMC member will still need to see a further acceleration to meet their 4Q25 forecasts from June.
- Labor data were mixed. Latest jobless claims were in line to slightly better than expected, with initial claims trending a little higher but still impressively low whilst continuing claims are broadly plateauing after sharper increases in 1H25. But within the Conference Board consumer survey, the labor differential edged lower again, suggesting a continued upward trend in the unemployment rate.
- Elsewhere: regional Fed activity surveys were individually mixed, but combined generally showed an improvement in both manufacturing and services activity albeit with continued upside price pressures.
- Consumer sentiment (UMichigan and Conference Board surveys) and housing activity remained soft.
- Apart from Gov Waller again making the case from rate cuts, other FOMC colleagues who commented this week were a little more guarded when it came to the need for easing, to our ear.
