Good morning,

The head of the Bank of England called Rishi Sunak’s bluff by saying that a no deal Brexit would be worse for the economy in the long term than the effects of covid 19. The Chancellor probably believes the same, but was toeing the party line on Sunday when he was speaking with Andrew Marr and seemed to be saying that we could get away with a no deal because the economy will be in such a bad shape that it would largely go unnoticed! We’re just 37 days away from leaving the EU and still there’s no sign of a deal. One thing that could speed it up is that Michel Barnier is likely to be cleared to continue face to face talks with Sir David Frost, following a Covid quarantine.
Whether this delivers the impetus for a deal is questionable, given that both have the same mandate and both have been unable to get past the sticking points – our take on it is that this comes down to Boris Johnson ad Ursula von der Leyen getting face to face and, not letting perfect be the enemy of good, and signing something that stops us going over the cliff edge – it also wouldn’t surprise us if they agreed something with a lot of future re-negotiation clauses in it, because the EU have a long track record of kicking the can down the road.

Boris had the domestic agenda on his mind yesterday when he delivered to the Commons his post lockdown plans: We’ll come back out into a three tier system, but the tiers have been simplified to make them easier to follow. Further long-term restrictions will be lifted, with live sporting events allowing fans to attend in al but the highest tier, whilst pubs will only have to call last orders at 10pm and not kick everyone out. The big unknown is whether there has been enough progress in the test and trace programme for it to have a meaningful impact in virus control, though one major positive is that we will get mass testing in all tier three regions. We’ll find out later this week which tiers are applied to where – there’s a great graphic from Simple Politics at the bottom of the page summarising what you can and can’t do.

Back to Rishi Sunak, who looks to be pressing ahead with an inflation reform that could take billions off the overall cost of government debt repayments: Currently most instruments that are inflation linked are benchmarked against the Retail Price Index – you’ll know this as the contentious index that always pushes season ticket prices up by more than the real cost of inflation every year – Rishi wants to ditch RPI and move to the more usual measure of CPI, plus house prices – CPIH. As CPI moves up and down much more slowly than RPI and as increases are the only thing they worry about from a debt perspective, government bonds that are inflation linked would move over to the CPIH benchmark and dramatically reduce the government’s repayment burden over time. Great news for the government, far from great news for the bond holders. Those bond holders include a massive number of pensioners with inflation linked pensions and the sort of drop in return that their portfolios will see would mean a material difference in what they’ll receive. The main question now is on the timing of the change, with it originally not expected to come in before 2030, but Mr. Sunak will be sorely tempted to get in there early, because the savings are so substantial.

We’re going to hear from the chancellor tomorrow with his autumn spending review, which is going to be a weightier affair than usual and more akin to a budget. He’s likely to cover public sector pay freezes, reductions in overseas aid, the ‘levelling up’ agenda and any further cash commitments to it (though this will be an easy one to claim funding for that is already committed, such as free port spending) as well as possible hints at future tax rises, though we can’t see him raising them now, when he might as well wait and see what the final bill is looking like by the time we get to the spring and then he can work out just what needs to be done.

Across the Pond: The big news is that Donald Trump has almost conceded… In a tweet last night he said that he’s allowing the transition teams to speak, but that he will continue to pursue his legal challenges over the election outcome. There has also been a formal letter from the head of the General Services Administration to Joe Biden to say that they are willing to start the process.  The news that a transition is in play has been welcomed by the markets and will mean that Joe Biden and his team can start to work with Dr. Fauci and his covid team to plan and deliver more robust and effective contagion measures than those currently in place.

As the president-elect starts to stack his cabinet, one very familiar face (and voice) is that of Janet Yellen, former Chair of the Federal Reserve and his pick for Treasury Secretary, which is an excellent choice. Ms. Yellen is going to bring a huge mount of experience and stability into the post and her understanding of central banking is likely to make for a much more harmonious relationship between the Fed and the White House. According to the FT, she has been advising Joe Biden and Kamala Harris since before the election on what the fallout from the virus looks like and how they might manage it, with the general advice being that interest rates are going to be low for long, so fiscal stimulus is affordable and advisable. Her future job is being made all the more difficult by the current administration, with Steve Mnuchin set on closing some of the emergency lending facilities that the Fed has put in place with very little reason for doing so.

So all of the above has left the market in a pretty reasonable shape. The risk-on environment has continued to soften the Dollar and the hope that a Brexit deal is imminent is keeping Sterling well supported. Equity markets are going to be a buy, almost regardless, given the amount of money out there that can’t find a yield elsewhere, so we could be nicely positioned to see a Santa Claus rally this year. Ahead of Christmas, we’ve got Thanksgiving this Thursday and Black Friday too – not forgetting cyber Monday for good measure. This will be especially important for UK retailers, as they’re missing at least one weekend of Christmas shopper footfall – the risk for them though is that the money that does get spent could largely flow to Amazon, so if you can ‘shop small’ online, you definitely should!

Have a great day

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