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UK public sector borrowing set to see another big jump

It seems somewhat counterintuitive at a time when politicians appear reluctant to pull the trigger on fiscal stimulus plans, that when we do get one, the one index that should benefit underperforms with the FTSE 350 and FTSE 100 both falling back over 1%, in contrast to the rest of Europe which fell by a significantly lesser degree.

Yesterday’s new Winter Economic Plan by chancellor Rishi Sunak will be the replacement for the current job retention scheme which is due to expire in October. To his credit the chancellor didn’t hold out false hope in terms of trying to preserve every job. No one would have believed him if he had done, however the overall market reaction appeared to be one of some disappointment that he didn’t do more.

Whatever side of the fence you happen to sit, the stimulus package announced yesterday was still significant, and while the numbers involved weren’t nearly as large as the furlough programme, they were never likely to be. The programme was also significant because at least the UK is acting, and acting in a manner faster than the US, which is currently politically gridlocked, and Europe, where the pandemic recovery fund won’t even be available until next year at the earliest.

The fact remains the six-month wage subsidies announced yesterday were still historic in their scope and breadth, and it takes quite something to see the head of the TUC, as well as the head of the CBI in the same photo opportunity as a Conservative Chancellor of the Exchequer, which would appear to suggest a broad level of consensus.

The biggest fallers yesterday were in travel and leisure given that, apart from the extension of the VAT cut until the end of March 2021, and VAT deferrals, there was little in the package for them.

At the peak of the furlough there was 8.9m people tapping into the public purse and while that number has come down, it is still up to nearly 3m people who may well not have a job to go back to by the end of the year, especially with the new tighter restrictions, which in turn could mean some of those who have returned to work, may not be able to carry on for any length of time, if the economy slows further as we head into Q4.

It has become increasingly obvious the longer the pandemic has gone on that a lot of jobs, particularly in aviation, are unlikely to come back any time soon. It appears that the Chancellor has made the same calculation and this appears to be why he is taking the action that he is.

The new program will also, probably be cheaper in the long term, if it is successful, however there is a fairly even chance, that it may not be the last fiscal program the government announces in the next few months.

Today’s public finance numbers for August will also be a timely reminder as to how much the pandemic has already cost in terms of new borrowing. Since April the government has already borrowed £147.2bn, and in August this is set to increase by another £39.5bn as the £522m cost of “eat out to help out” gets added to the numbers. For now, financial markets don’t seem to care that much, and why should they when they look on the other side of the Channel when similar large amounts of money are also being pledged to offset the economic shocks in Europe.

If there is a silver lining for the Chancellor it’s that the UK economy may well have done better than expected throughout the summer, which could mean that the spending deficit may well not be as large as first feared in April. In September Gfk consumer confidence improved modestly to -25 from -27, however in light of the tighter restrictions this number is likely to deteriorate as we head into October.

While investors were fretting about the prospects for the economic outlook, and a Federal Reserve increasingly anxious about a lack of fiscal support, stock markets have spent most of the week on an emotional roller-coaster, with investors getting a significant case of whiplash.

US markets managed to eke out a modest gain yesterday, with the tech sector and financial leading the overall gainers as US economic data once again painted a mixed picture. New home sales totalled 1m in August at the same time as weekly jobless claims nudged themselves higher.

Today’s durable goods numbers for August are set to see a slowdown from July, with expectations of a rise of 1.1%, down from 2.6%.  

As a result of this late recovery for US stocks, markets here in Europe look set to open higher, though it still looks likely that we’ll finish the week lower, having not even got close to reversing the big losses we saw on Monday, which were precipitated by dire warnings from the World Health Organisation of a serious situation in Europe, as virus infections continued to rise sharply.   

EURUSD – the direction of travel remains for a move lower towards 1.1530 remains intact while below the 50-day MA at 1.1780. Only above the 1.1800 area negates and argues for a return to the 1.1900 area. 

GBPUSD – appears to have formed a short-term base near the 1.2675 level, and could well squeeze back higher. A move below argues for the 1.2500 area. We need to overcome the 1.2780 area to open up the prospect of a return to the 1.2870 highs of Monday.  

EURGBP – having failed at the 0.9220 area the risk is for a return towards the recent lows at 0.9080, with interim support also at 0.9120/30.

USDJPY – still looking well supported while above the 105.20/30 area, with the next resistance up near 106.20. Below 105 20 opens up the risk of 104.80.

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