Normalisation

The 25-basis-point hike by the US Federal Reserve in March was almost a fait accompli after February’s nonfarm payrolls figure easily outpaced economists’ expectations.

Accompanying wage growth and falling unemployment were two more ticks in the box. The US is humming right now, with consumers and businesses more confident than they have been in almost a decade. One of our global equity analysts, recently back from Midwestern America, reports that optimism there is palpable.

Investors are now discussing just how many interest rate increases we could see this year. The Fed funds rate is now at the 0.75-1.00% band. Two more rises seem locked in this year, barring any unexpected calamity. But could the Fed funds rate hit 1.5% by the year’s end? Or 1.75%?

Investors remain bullish and the economic data backs up that sentiment. Around the world, business and consumer sentiment is improving, along with higher inflation and lower unemployment. There is still some choppy water ahead though. The UK Government is gearing up to trigger Article 50 this month. And apparently a second run at secession by Scotland (and Northern Ireland) could follow quickly behind.

Dutch right-winger Geert Wilders and his anti-immigrant and eurosceptic PVV party should garner a plurality in the Netherlands’ election this month. Mr Wilders’ ability to stitch together a coalition seems less convincing than his poll numbers, however. Still, 2016 taught us not to underestimate the possible.

Index

1 month

3 months

6 months

1 year

FTSE All-Share

3.1%

7.9%

8.6%

22.8%

FTSE 100

3.1%

8.0%

8.9%

24.1%

FTSE 250

3.5%

7.4%

7.0%

16.2%

FTSE SmallCap

1.7%

8.0%

9.3%

24.5%

S&P 500

5.0%

8.3%

15.4%

39.1%

Euro Stoxx

2.0%

9.5%

10.2%

28.6%

Topix

2.7%

7.0%

13.5%

36.6%

Shanghai SE

4.0%

0.4%

7.5%

28.7%

FTSE Emerging

4.4%

9.3%

11.7%

46.9%

Source: FE Analytics, data sterling total return to 28 February

Politics, statistics, facts

The Chancellor charted a course for another parliament of austerity in the Spring Budget as he continues to chase his predecessor’s goal of a budget surplus.

It will take much longer than originally expected and even longer than we had thought a year ago, despite the UK economy’s welcomed post-Brexit buoyancy. The next few years are likely to be ones of belt tightening as we try to reduce the weight of our borrowing.

Chancellor Philip Hammond pointed out that the UK spends more on interest than it does on police and defence combined. Numbers are malleable things though.

Of the roughly £1.7tn of outstanding gilts, just shy of a quarter are held by the Bank of England, while the government’s Debt Management Office holds another 7.5%. That means 31.5% of the country’s debt is held by itself. And a similar proportion of the interest payments of this debt are going to itself. If you strip out these holdings, which seem unlikely to be sold back into the market, then the public accounts look much rosier: Debt to GDP is about 60% rather than 85% and our annual interest payments are £34bn not £50bn.

Should we include this debt in our policy discussions, if the nation has effectively bought it back? And how would it affect government decisions if it wasn’t?

According to the Institute for Fiscal Studies, the changes to self-employed NICs, announced at last week’s Budget, would mean more money for those earning under £15,570. The maximum loss – which would hit those earning more than £45,000 – would be about £590. A quick back of the envelope calculation using HMRC figures confirms that. However, the headlines quickly turned against the Chancellor: he had broken the Government’s promise to not raise taxes and was now doing so to take from the strivers. The numbers don’t seem to back up that accusation, but then, numbers can be manipulated.

Self-employed workers have a point: they are usually in more tenuous employment than their salaried colleagues and are not eligible for sick pay or maternity leave. A lesser rate of NIC is fair. But the conversation should be around how much this should be and whether people would rather have more money or less tenuous employment.

Over the past few years, the number of self-employed has skyrocketed, with much of that move driven by tax, according to the several think tanks. At the moment, some companies have a strong incentive to push workers into self-employed status. They don’t have to pay any NICs for contractors and can avoid offering the rights of full-employment. Self-employed workers are incentivised to go along with this because of a tax loophole. If that distortion is closed, will that mean companies will cut jobs? Or will they be pushed to offer formerly contracted employees a better deal? And if so, will it mean that businesses pay more in NI? Should we even pay NI? Perhaps NI as it was envisioned in the early 20th century is outmoded and would be better folded into the income tax, creating a single simple payroll levy.

These are the debates we should be having, not knee-jerk arguments about political process.

Bond Yields

Sovereign 10-year

Feb 28

Jan 31

UK

1.15%

1.42%

US

2.40%

2.47%

Germany

0.21%

0.44%

Italy

2.09%

2.27%

Japan

0.05%

0.09%

Source: Bloomberg

 

            

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