Of politics and rate cuts

Of politics and rate cuts

The last fortnight has seen a flurry of significant events, from the UK budget on 30 October to Donald Trump’s election victory, interest rate cuts in the US and UK and, on Friday, China’s announcement of a new stimulus programme designed to boost growth. This week we offer some brief reflections on these events.

• US equities rallied on the Trump victory, with the S&P 500 ending the week up by 4% and the Russell 2000 index, of small-cap US firms, up by over 7%.  Equities moved higher on the expectation that the new administration would lower rates of personal and corporate taxation. Goldman Sachs estimates that Trump’s proposal to cut the corporate tax rate from 21% to 15% would raise the earnings of the S&P 500 group of companies by 4%.

• US interest rate expectations also rose as markets priced in higher inflation on the back of promised tax cuts and increased tariffs on imports. Although the Federal Reserve reduced US rates by 25bp last week, the pace of easing is expected to slow from here, with markets pricing in the interest rates fall from the current level of 4.5%-4.75% to 3.75% at the end of 2025, up from last month’s expectation that rates would fall to 3.4% late next year. Yields on US Treasuries, or government bonds, also edged higher on the expectation that interest rates would stay higher for longer and the possibility of higher government borrowing under the new administration.

• Last Friday the Chinese authorities unveiled a $1.4tn fiscal stimulus package, the latest in a series of measures, including interest rate cuts and increased government borrowing, designed to bolster flagging growth. Some commentators speculate that the Chinese authorities also want to support domestic activity in anticipation of new US tariffs on Chinese exports. The loosening of fiscal and monetary policy has helped boost Chinese equities which, having more than halved in value between early 2021 and late 2023, have risen by over 20% this year. However, the measures undertaken in the last year have not had the desired effect on activity, which remains lacklustre. It seems likely that the Chinese authorities will announce further stimulus next year.

• Last week the Bank of England cut UK interest rates by 0.25% and noted that recent UK budget measures will add 0.75 percentage points to GDP and around 0.5 percentage points to consumer price inflation in a year’s time. The main driver is large increases in government consumption and investment, which will pump up demand in the near term. Any improvements in the supply capacity of the economy from higher levels of investment will take much longer to materialise.

• As in the US, higher inflation expectations have led markets to price in a slower and shallower easing of monetary policy. Markets now expect UK rates to fall from 4.75% to 4.0% by the end of next year, 50bps higher than the 3.5% markets expected at the beginning of October.

• The impact of the biggest tax change – the £26bn increase in employers’ national insurance contributions (NICs) – is harder to assess. Bank of England governor Andrew Bailey said firms could deal with higher costs through some combination of raising prices, accepting lower profits, improving productivity, making smaller increases or cutting jobs. The Office for Budget Responsibility, which forecasts the impact of tax changes, has a more straightforward view. It estimates that in the long term 76% of the total cost of higher NICs will be passed on to employees in the form of lower wages. As a result, the OBR has reduced its previous forecasts for wage growth in this parliament.

• Some retail firms, including Sainsbury’s and M&S, have said they will raise prices to cover the cost of higher NICs while pub chain Wetherspoons said "all hospitality business" will increase prices because of the tax changes. Shares in UK bakery chain Greggs fell 8% on Friday morning after Deutsche Bank predicted that the chain faces an extra £97m in costs over the next two years as a result of budget measures.

• On the face of it, 2025 should be a positive year for the US and the UK, with good growth and falling interest rates. The economy of the euro area is also picking up, albeit with Germany lagging. After last week’s emphatic Trump victory, the new unknown relates to US policy. We will get a clearer idea of the administration’s intentions on taxes, tariffs and industrial policy as Mr Trump makes his key appointments over the coming weeks.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week down 1.3% at 8,072 after a volatile week due to the US election, US and UK interest rate cuts, and China’s fiscal stimulus package announcement.

Economics

• The US Federal Reserve cut interest rates by 0.25 percentage points to 4.5%–4.75%, saying “inflation has made progress towards the Committee's 2% objective”
• US consumer sentiment, measured prior to the election, improved in November to reach its highest level since April
• The Bank of England cut interest rates by 0.25 percentage points to 4.75%, the second rate cut this year, following the news that inflation fell below the Bank’s 2% target in September
• Bank of England governor Andrew Bailey said, “if the economy evolves as we expect, it’s likely that interest rates will continue to fall gradually from here” 
• The average price of a house in the UK reached a record high of £293,999, growing by 3.9% in the year to October, according to Halifax
• UK chancellor Rachel Reeves said, “we are not going to be coming back with more tax increases or more borrowing” following the recent budget which included £40bn of tax rises
• UK construction activity increased for the eighth consecutive month in October, however at a slower pace compared with September, according to surveys of purchasing managers
• UK car registrations fell 6% in October compared with the same month last year, with only battery electric vehicles seeing growth, according to the Society of Motor Manufacturers and Traders
• Euro area retail sales increased more than expected in September, by 2.9% compared with the same month last year, driven by increases in non-food products
• German industrial output declined by more than expected in September as Germany’s current economic downturn continues. Exports also fell more than expected in September, by 1.7% compared with the previous month
• China’s exports increased 12.7% in October compared with the same month last year, the highest growth rate since July 2022, amid concerns of US tariffs on imports of Chinese goods

Business

• Car manufacturer Nissan announced 9,000 job cuts and a 20% reduction in global production in a sign of difficulties in the automotive sector 
• Manufacturing workers at Boeing voted to end their current strikes, agreeing to a 38% pay increase over the next four years
• Airline owner IAG reported record profits in the third quarter of this year, defying the wider market trend
• CO2 emissions from private jets increased 46% between 2019–2023 and are expected to continue growing, according to research published in the Communications Earth & Environment journal
• More than 50 companies, including Nestlé and Ferrero, said delays to the EU’s proposed deforestation law, which bans the sales of goods made using certain commodities grown on deforested land, would create further uncertainty
• Major motor finance lenders temporarily paused lending amid a UK court ruling whereby car dealers receiving commission from motor finance providers must disclose to customers and obtain their consent, the FT reports
• The UK Serious Fraud Office will receive additional funding of £9.3m to improve its handling and management of cases as part of the government’s commitment to crack down on financial crime
• The UK government announced that university tuition fees will increase by £285 to £9,535 a year, starting in the next academic year, amid growing financial pressures across the sector

Global and political developments

• Republican nominee Donald Trump was elected to become the 47th president of the US. The Republican Party also regained control of the Senate
• President-elect Donald Trump appointed his campaign manager Susie Wiles as chief of staff
• US Fed chair Jay Powell said when questioned that he would not resign if asked by president-elect Trump
• French president Emmanuel Macron said that the EU needs to become “omnivores”, saying, “if we decide to remain herbivores, then the carnivores will win and we will be a market for them”
• Russian president Vladimir Putin said that he would be ready to speak with president-elect Donald Trump regarding US-Russian relations and Ukraine
• Ukrainian president Volodymyr Zelenskyy said that making concessions to Russia would be “unacceptable for Ukraine and suicidal for all Europe”
• Ukrainian officials said that its military had fired at North Korean soldiers in the Kursk region
• Israeli prime minister Benjamin Netanyahu dismissed defence minister Yoav Gallant due to a “crisis of trust”, with protests ensuing after the decision. Foreign minister Israel Katz will replace Gallant
• Israel Defense Forces’ chief of staff Herzi Halevi said that Israel was formulating plans for the expansion of ground manoeuvres in Lebanon
• The ruling German coalition collapsed after chancellor Olaf Scholz of the Social Democratic Party dismissed finance minister Christian Lindner of the Free Democratic Party, leading to a parliamentary vote of confidence in January
• UK deputy prime minister Angela Rayner suggested that new council homes in England would not be sold to tenants under the current Right to Buy scheme to maintain the stock of social housing
• UK Conservative Party leader Kemi Badenoch began to appoint her shadow cabinet, with Chris Philp as home secretary, Mel Stride as shadow chancellor and Dame Priti Patel as shadow foreign secretary
• Trade union Aslef suspended planned strikes of London underground train drivers following an “improved offer” from the Transport for London

And finally… a pair of original ruby slippers worn by Judy Garland in “The Wizard of Oz” musical are currently up for auction nearly two decades after being stolen. The culprit stole the shoes believing they were covered in real jewels – Doro-thief