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Morning Update

Macro Monday, legislation passed on a partial budget from the US Senate, discussion on proposed invasion of Rafah, Japan see 0.1% growth after narrowly avoiding a recession, and this week's data releases.

Macro Monday

In FY 2023, US federal government spending amounted to around $6.2 trillion. Around 90% this was the result of spending on defence, Medicare, social security payments and other tax credits to individuals, payments to States and interest payments on national debt.

US Budget

In the US on Friday night, the Senate passed legislation on a partial budget, that means partial government shutdowns were narrowly avoided. The US budget was meant to be passed at the beginning of their fiscal year, which started on1st October, but so far they’ve been plugging gaps and rolling over funding on a near weekly basis for most departments of government.

This bill, worth almost half a trillion dollars, funds a number of programmes including agriculture, housing and energy until 30 September and, bizarrely for the US, there was quite a bit of partisan unity, as the vote cleared 75–22.

There’s a much bigger budget to get passed in the next couple of weeks though, which includes military spending, homeland security and healthcare – all subjects with which the parties have differing opinions – and this needs to be taken care of by 22 March.

Israel-Gaza

Joe Biden has put a red line in the sand, as he’s told Benjamin Netanyahu that any invasion of Rafah over Ramadan would be crossing that red line. There are voices of concern from a lot of Israeli allies to say that an attack on Rafah would be a humanitarian catastrophe, with almost half of Gaza’s population seeking refuge there.

Despite this, Netanyahu has said of Rafah “we’ll go there. We’re not going to leave them. You know, I have a red line. You know what the red line is? That October 7 doesn’t happen again. Never happens again.” He’s also claimed that he had some support of Arab leaders in pressing ahead with the offensive.

He thinks that fighting would be over in a maximum of two months, probably less, because he estimates that they’ve already “destroyed three quarters of Hamas’ fighting terrorism battalions”. He’s also reiterated that he would not allow a two-state solution and that this is a position supported by the Israeli people – though his opinion rating within Israel is at an incredibly low standing and his biggest opposition contender, Benny Gantz, was in the US last week and was given a very warm welcome as a ‘leader in waiting’ – something that Biden would love to see, as it would certainly make his life a lot simpler.

Politico has a lot more detail: click here to read.

Japanese Growth

Fresh data out of Japan indicates that the country narrowly avoided a recession at the back end of last year having seen growth of 0.1% during the final quarter of 2023. This followed a contractionary print of 0.8% over Q3, with growth picking up in capital expenditure and exports. Nonetheless, private consumption fell again for the third consecutive quarter, indicative of the challenges continuing to face the world’s third largest economy.

Looking Ahead

This week’s main data events include the release of UK labour market figures tomorrow morning at 0700 ahead of US CPI inflation at 1230. Here, markets will be keeping a close eye on UK unemployment which last month came in at 3.8%, 10bps lower than November’s figure and a considerable decrease from the recent high of 4.3% in July. Last month’s figures showed the number of unemployed persons fell by 87,000 to 1.32m with the number of full-time employees seeing an uptick.

Markets will also be hotly anticipating the release of UK average hourly earnings which are expected to ease to 5.7% (down from 5.8% last month). Last month’s figure represented the lowest level in fourteen months, though remains historically high compared to the long-term average. When adjusted for inflation, last month’s print indicated real wages rising 1.8%, up around 0.3 percentage points in November.

Tomorrow’s data follows the release of figures from Reed Recruitment which this morning indicated that job vacancies dropped to their lowest level in over in three years in the UK. This came as the number of job applications rose by 20% on an annualised basis.

Looking next to the US, market attention will be focused on the release of CPI inflation figures as investors continue to consider the Fed’s next move in relation to their monetary policy pathway. The general market consensus is pointing towards an annualised print of 3.1% for February – in line with last month’s figure. Presently, markets have priced in around four 25bps cuts over the coming year for the Federal Reserve.

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