The budget built on hope
The Market gives Alistair Darling the benefit of some considerable doubt, for now anyway. The numbers that we would prefer to see small and positive are horrendously large and negative whilst the future growth projections seems overly optimistic – especially compared to the expectations published by the IMF this week.
To expand further, The Chancellor sees 2009 growth at between -3.25% and -3.75% and Public Sector Net Borrowing for the year at 12.8% of GDP which in number terms is around £175 billion. To fund this, the DMO have scheduled the issuance of £220 billion in gilts for the period 2009/10 up from £146.4 billion in 2008/09. The bulk of the increase is earmarked for medium term maturities which fall within the BoE’s reverse auction time frame.
The potential problem for the market and hence Sterling is the assumption for future growth rates going forward to 2013 – at which point Mr. Darling has penciled in a +3.5% growth rate for the economy and adjusted his borrowing projections accordingly. This assumes positive outcomes from so many variables beyond his control that one has to assume one hurdle or other will trip him up – not that he will be in charge of the economy by then anyway. As intimated by RBS in a report this morning, it won’t take long for under-achievement to draw comparisons with other recent Sovereign disasters and ‘Reykjavik on Thames’ to become the word on the street.
This sort of development might easily attract the unwanted attention of the ratings agencies. Sterling on the exchanges however, is not presently an easy target and the decline against the Dollar and Euro had more to do with a statement in the Budget to do with competitiveness than with concerns over the future of the UK balance sheet.
The Chancellor stated, “A sustained and strong recovery depends on companies, of all sizes, making the most of new global opportunities” adding that “a competitive exchange rate will help exporters.” Whilst not exactly talking Sterling lower he certainly confirmed the view that the Government were tolerant (in the short term at least) of a weaker Pound – versus the Euro especially. The decline was sharp but small and given the lack of follow through, it looks as though Sterling will bounce from here.
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Also yesterday we saw the release of the MPC minutes from the April meeting and numbers relating to the UK employment situation. As expected, the minutes provided a pretty morose assessment of the global and domestic economy, but do however maintain an optimistic theme and provide some ray of sunshine, largely on the back of Sterling’s recent weakening with the subsequent positive impact on UK exports and the continued depression on cheap imports.
The BoE, alongside the rest of those in the know, found February’s rise in CPI (to 3.2%) “Unexpected”, attributing it to the rise in domestic prices on the back of weakened Sterling, although they did manage to call March’s CPI decline putting it down to “diminishing contributions from retail energy and food prices and rising spare capacity”. To date £26.5bn of Quantities Easing (QE) has been undertaken with the full £75bn being completed within the next 2 months, although the volatility in key economic indicators has pushed the MPC into a decision to assess QE’s impact every month. The RPI figure out yesterday (-0.4%) may well give the MPC some impetus to slow down QE in the short term and look to prolong the time scale for completion, maybe out into the second half of the year.
The UK unemployment figures released yesterday confirmed that in the 3 months through February 2009 the International Labour Organisation unemployment rate rose to 6.7% versus last quarter’s 6.5%. This further deterioration matched analyst‘s expectations so it didn’t come as much of a surprise that unemployment is continuing on the upward trend that has been in place since March 2008.
On other unemployment measures, the number of jobless rose by 177,000 for the same period so total unemployment now stands at 2.1million. This is the highest level since 1997, just before the current Labour government took office. Sterling declined in early trading yesterday as a result of this data. UK Employment Minister, Tony McNulty’s comments yesterday regarding the unemployment level provided little optimism for the future, conceding that “it is very, very disappointing…and I don’t think we have hit the bottom yet at all given this is a lagged indicator”.
Unemployment is expected to remain downbeat for the rest of the year, with some analysts’ predicting that the ILO measure of unemployment will peak at just over 10% in early 2010. This added further pressure on the Government to take decisive action in their budget yesterday. Chancellor Darling unveiled a £1.7bn package aimed at limiting the periods of unemployment and protecting vulnerable school and university leavers from unemployment.
Stock Markets ended slightly down overall yesterday following the end of the positive Banks’ results trend – Morgan Stanley raising doubts over stress tests and future profit potential within the sector following their reported loss for the 1st Quarter. Little data today so expect the Dollar to trade off any moves in the Stock Markets…. just for a change.
Scheduled US Corporate results today are PepsiCo, American Express, Amazon, Conoco, PNC Financial and UPS. We also get a couple of Federal Reserve speakers this afternoon.
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