The week ahead 04 November 2024 - Financial markets cool on Budget

What to watch out for in the UK economy and property market this week.

As was widely expected, the Chancellor announced big increases in both taxation and debt issuance in the Autumn Budget. There was also a rise in the minimum wage and investment in infrastructure. The news got a cool response from the financial markets, with 10 gilt yields rising almost as soon as the Chancellor finished speaking, and pound fell against the dollar. That said, the initial reaction while negative was not as severe as the backlash following the mini-budget of September 2022. However, we will need to see how things play out in the coming weeks.

Given the combination of the minimum wage increase plus around £100 bn of public investment, a lot of stimulus will be flowing into the economy in the coming years. Much will depend on how much of that money (which is essentially printed) results in higher productivity growth, as otherwise it will become inflation.

In other news, last week saw GDP figures released for the US and several major European economies. US GDP (which is reported as an annualised figure) stood at 2.8% in in Q3, which was down slightly on the 3.0% recorded in Q2. This confirms the American economy is seeing a ‘soft landing’. Strong consumer spending helped support growth. The German economy confounded forecasts of a contraction by achieving Q3 GDP growth of 0.2% on a quarter-on-quarter basis. France also reported a rise in GDP in Q3 of 0.4%, as did Spain (0.8%), although Italy flatlined. Overall, the Eurozone reported growth of 0.4%, which was double the Q2 figure of 0.2%.

The big news story for this week will be the Base Rate announcement from the Bank of England Monetary Policy Committee (MPC). The consensus view is we shall see a 25 bps reduction to 4.75%, however there is a case for a more aggressive reduction. Firstly, UK CPI inflation in September at 1.7% was below the MPC’s 2.0% target, although core inflation (which excludes volatile items, like fuel and food) is still high at 3.2%. Second, other central banks have become more proactive and announced 50 bps cuts recently, such as the US Fed and the Bank of Canada. We suspect the MPC may feel that a big cut straight after the Budget might call into question the Bank of England’s independence, so we are leaning towards the consensus forecast of a 25 bps cut.

This week will also see the US general election on Tuesday, with the polls looking too close to call. Also, the US Federal Reserve will announce its interest rate decision on Thursday, with a 25 bps cut widely anticipated.

This week’s figures

TUESDAY 5 NOVEMBER

UK Composite PMI, October

52.6 previous
51.5 forecast

The early ‘flash’ PMI figure for October recorded a decline to 51.7. We believe that later survey returns may have been influenced by concerns over the Budget, so we are predicting a downwards revision to 51.5.

THURSDAY 7 NOVEMBER

Bank of England Base Rate Decision

5.00% previous
4.75% forecast

With inflation now below target, we believe the MPC will be under pressure to cut rates, probably by around 25 bps. However, we would not rule out a larger 50 bps reduction as a possibility.

Federal Reserve Funds Rate Decision

4.75% previous
4.50% - 4.75% forecast

With inflation established on a downwards trajectory, but GDP growth still robust, we believe the Fed will continue to cut rates with a 25 bps reduction on Thursday.