Osborne To Take Over From Haldane And Knock The Pound

Russia vs Turkey the latest market threat

Only one story dominated markets yesterday and it wasn’t the pontificating of Monetary Policy Committee members on interest rates and the state of the UK economy. The news that a Russian jet had been downed by Turkish forces set markets on edge and hyped up fears that the mishmash of coalition forces, the Free Syrian Army and the Russians are not able to bring about a sufficient level of coordinated violence against ISIS with a disparate command and control structure.

Turkish lira was smacked hard yesterday and will continue to remain unfavoured by markets as traders bet on further clashes between the two parties and, most probably, an end to Russian exports of natural gas to Turkey – which happens to be Russia’s second largest customer.

Elsewhere and on wider markets – except a typical bump higher in oil prices that any form of conflict tends to bring – markets have remained relatively sanguine. Developments and suspicions will continue to emerge through the coming days.

Haldane wage fears knock the pound

Yesterday’s testimony from Mark Carney and other members of the Monetary Policy Committee succeeded in taking sterling lower through the course of the day. Mainly these falls came thanks to comments from Bank of England Chief Economist Andy Haldane that the levels of wage growth in the UK economy may be slowing.

Unfortunately this is not the only risk to sterling in the near term.

Osborne to announce spending cuts

Today’s Autumn Statement and the associated economic projections released by the Office of Budgetary Responsibility represent a critical chance for analysts to judge just how contractionary the announced spending cuts or tax increases are likely to be on the UK economy.

One of the primary risks that the Bank of England is weighing up as part of its decision around raising interest rates is just how much steam will be taken out of the economy by these fiscal changes. Osborne will lift the veil on these changes and this therefore represents a real opportunity for some sterling volatility.

Osborne and the Tories have been clear throughout the election cycle and since the Conservatives came to power that the UK’s budget deficit would be returned to a surplus within the lifetime of this parliament. Some moderation may have crept into his thinking since party members and Conservative MPs expressed their disquiet around proposed changes to the tax credit system but any lessening of fiscal tightening will likely be purely cosmetic in my opinion.

Not much room for manoeuvre

From a fiscal point of view 2015 has been a rather poor year, with high economic growth not being mirrored in tax receipts and borrowing rising as a result. Unfortunately, the square of all this means lower growth mainly expressed through a depressed consumer expenditure landscape.

Tie that into an economy in which inflation is set to return and wages cannot be guaranteed to rise and we have some definitive risks to the growth profile of the United Kingdom.

Cuts are coming and with ever larger amounts of government spending seemingly ringfenced by this Chancellor, some departments are going to get very hard.

Osborne speaks at 12.30.

The Day Ahead

This afternoon’s US inflation numbers will be closely watched to see whether PCE, the Fed’s favoured price measure, is creeping back towards 2.0%. Core PCE is expected to drive to 1.4% from 1.3% last month.