UK FISCAL: Wider Budget and Political Implications of Today's Data (2/2)
Sep-19 13:50
- The question now turns to is how can the government satisfy markets, the electorate and its backbenchers (who have already shown their ability to block fiscal reforms and are far from toothless as had been thought originally based on the large Labour majority). It looks increasingly likely to us that one of the manifesto commitments needs to be broken. Income tax has a broader base than employee NICs (as it applies to pensioners and on unearned income) while VAT seems unlikely (as it would increase headline inflation at a particularly difficult time for the MPC and may even raise the possibility of hikes rather than cuts in 2026).
- So an income tax increase seems increasingly likely to us (albeit not our base case at this point).
- Can the Chancellor (or indeed the government) survive breaking its manifesto commitment? If the alternative is that taxes are tweaked around the edges and indirectly cause discomfort to the electorate, it may be seen as a risk worth taking. However, we question whether the government thinks we have reached that juncture yet.
Want to read more?
Find more articles and bullets on these widgets:
Historical bullets
EUROPEAN INFLATION: Analysts Stick To Previous ECB Calls After July Final HICP
Aug-20 13:40
Analysts aren't unanimous but on balance view the final July HICP release as favourable in terms of the ongoing disinflation process in the Eurozone. They stick to their previous calls on the ECB rates path ahead. Some highlights:
- Commerzbank: "Volatile service prices distorted the core rate slightly downward [...] As this effect is unlikely to be lasting, we are adjusting the core rate upwards accordingly. Without these volatile components, the core rate would therefore have been 0.24% in July (seasonally adjusted month-on-month rate). [...] Even with a slightly weaker core rate, year-on-year inflation is likely to remain above the ECB's forecast in the coming months. We therefore consider further interest rate cuts by the ECB to be unlikely."
- Goldman Sachs: "Looking through the Easter-related distortions to services inflation, our summary indicator of sequential underlying inflation has been broadly stable over the past few months, but ticked down in July by 5bp to 0.18%mom. The change in our sequential summary measure reflects a sequential deceleration across most of the metrics we track"
- JP Morgan: "Our inclination is to view today’s report as constructive: we do need a run of soft monthly core price gains but see a good chance of this. The firmer currency, possible China deflation effects and, crucially, the moderation in wage growth argue in this direction [...] If core goods inflation sees payback in August, Euro area core inflation could slip to 2.1%oya and remain at that level in September. If correct, it would undershoot the ECB staff forecast of 2.3%oya for 3Q25. We then see it slipping below 2%oya early next year. [...] We continue to expect a further ease but have delayed this recently to October. This does, however, require the ECB to take more seriously the easing bias already in the staff projections."
EURIBOR OPTIONS: Put Condor Buyer
Aug-20 13:37
ERH6 97.9375/97.8125/97.6875/97.5625p condor, bought for half in 7.5k.
EQUITIES: US Cash Opening Calls
Aug-20 13:26
SPX: 6,408.4 (-0.0%); DJIA: 44,953 (+0.1%/+31pts); NDX: 23,338.8 (-0.2%).
