Good morning,

Most of the UK financial coverage over the weekend is surrounding what Rishi Sunak will or will not say on Wednesday at the budget.  The Chancellor himself was pretty tight lipped when he did the Sunday sofa circuit and so what we are getting in the papers is probably just a selection of leaks – credible or otherwise.  These leaks include plans to raise £6bn in income tax, by not increasing the thresholds at which the various rates are applied.  Over the course of this parliament, corporation tax could be set to rise by 25%, though when these hikes start isn’t yet clear.  One item that was announced ahead of Wednesday is a £5bn support package to be shared amongst around 700,000 eligible businesses.  The one off grant of up to £18,000 can be claimed by leisure and hospitality businesses to either help them get re-opened, or keep them afloat through the last weeks of the lockdown.  Businesses in these sectors might also benefit from a continuation in rates relief, reduced VAT and the alcohol duty freeze, but this is all TBC.

The Chancellor is also hoping to keep the property market moving, by guaranteeing 95% mortgages on properties up to £600k in value.  95% loan to value mortgages were a thing before the pandemic, though banks rolled back quite significantly in the immediate aftermath and are only really comfortable at 90%, for fears that they might be left in negative equity if things take a turn for the worse.  The banks’ guarantee will no doubt help a few more people onto the property ladder, but perhaps the bigger issue is that if you can only borrow 4.5 times your salary and the average UK salary amongst 25-35 year olds is between £26k and £32k, then you can only get a mortgage on a property worth £150k, where the national average for a property is about £250k. This means that buyers either have to come in with a much bigger deposit, or the government has to build more affordable housing… but only one of those keeps the property values of your voter base high!

Andy Haldane has warned that the ‘inflation tiger’ is prowling, which could force the Bank of England into action, and has warned other central bankers not to be too complacent.  The Chief Economist sees a variety of outcomes for inflation once we come out of lockdown, but he is leaning more towards us overshooting targets and being above target for a longer period because of the sharp resurgence in demand.  His comments came out on Friday and were enough to immediately put a stop to the month-end sell-off in Sterling, so people do seem to be taking note.  Bloomberg has a good summary of the predicament.

There was a great long read on the FT about the return of the ‘bond vigilantes’.  The article talks about how the bond market is historically the way that governments and central banks have been kept in check over the decades by investors selling bonds.  The article cites an amazing figure from JP Morgan, which is that global stimulus efforts since the Pandemic are north of $20 trillion, which is more than a fifth of global GDP – and there could be some more inbound…

Joe Biden got a step closed to his stimulus policy being enacted, after the Bill cleared the House – albeit by a wafer thin margin.  The President won despite a couple of Democrats voting alongside Republicans, but had to scrap the pledge for a $15 minimum wage and also the backup pledge to penalise any large companies that didn’t volunteer to take on a $15 minimum.  However, this does mean that only a Senate vote stands in the way of this being rolled out and though he’s only got a working majority by virtue of Kamala Harris’ tie break vote, markets seem confident he’ll get it passed.

Oil prices rose on the news of the vote and stock markets bid up slightly on the news too.  The thought of every American receiving $1,400 through the post and a large amount of those cheques being classed as ‘disposable income’ means that there will be a huge consumer splurge and also likely a big bounce back in the US driving season this summer, which in itself is normally enough to see oil prices move a little higher.  On top of that, there is some geo-political news helping things move a bit bid:  Iran has rejected direct talks with the US over the nuclear accord.  This has limited the opportunity for a swift reduction in tensions and as such has kept some pressure on.  Additionally Joe Biden is weighing his response to news that Saudi Crown Prince Mohammed bin Salman directly approved the killing of journalist Jamal Khashoggi.

Looking to the week ahead:  It’s a busy data week, with plenty of productivity figures due in from all corners of the globe.  The highlights will be the usual suspects of US payrolls, UK service sector output and European inflation numbers.  The market has started the month in a risk on mode, which has served Sterling reasonably well so far. Stock markets are also pointing a little higher as we get underway, but it’s a long month ahead and a lot of good news has got to be priced in by now.

Be well


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