UK public finances in focus ahead of next week’s budget

Yesterday’s European market session was a fairly subdued affair, even if it was a positive one, with the FTSE100 trading in one of its narrowest ranges this year.

By and large many companies have been reporting decent numbers and have been able to pass on the increase in costs, to their customers, without a significant impact on their sales growth numbers, or their margins.

While this is certainly encouraging there is no guarantee it can continue given that the over the next quarter costs will have increased further given the continued rise in raw materials and energy prices, and other supply chain disruptions. It is true that the build-up in savings levels by consumers over the pandemic, means that there is still an available buffer, but as the outlook darkens, that doesn’t mean consumer will go out and spend it, as concerns over demand destruction grow.

For now, that doesn’t appear to be worrying US investors with the Dow posting a new record intraday high, and the S&P500 coming to within touching distance of doing the same thing. 

This US exuberance isn’t translating into today’s European open which looks set to be weaker one, after markets in Asia came under pressure, with Evergrande shares once again getting clobbered as trading restarts there, while concerns about rising covid cases as winter approaches is again taking its toll.

UK public sector borrowing hit £20bn in August, as the costs of the pandemic continued to take their toll on the government’s finances.

Six months ago, this probably wouldn’t have been too much of an issue, however given the sharp rise in inflationary pressure seen since March when RPI was at 1.5%, measures to try and rein in the amount of government borrowing have moved up the governments list of priorities, especially since debt interest payments, which are linked to RPI have more than doubled after RPI hit 4.9% in September.

This, combined with a slowdown in the UK economy as a result of supply chain and workforce disruptions, labour shortages, as well as rising energy costs, has raised concerns about the sustainability of current borrowing, at a time when the UK economy is slowing from its post lockdown rebound. With little sign that the pandemic is anywhere close to an end point, the Chancellor next week will be hoping to try and find a way to help underpin the government tax receipts at the same time as not acting hastily and tipping the economy into a self-inflicted slowdown.

Today’s September borrowing numbers are expected to see another big deficit, even with the costs of furlough coming to an end, with another increase, up to £22.6bn.

Last week US weekly jobless claims came in at a new post pandemic low of 297k, as the divergence between them and recent payrolls numbers becomes ever more puzzling. Continuing claims have also continued to decline, as they come within touching distance of the 2.5m level. Expectations are for another decline to 293k, with continuing claims expected to fall to 2.55m.       

EURUSD – Appears to be finding support at higher levels with a break of the 1.1680 area, potentially opening resistance at the 1.1760 level. Still looks well supported while above the 1.1580 area. Below 1.1520 targets the 1.1450 area.

GBPUSD – Moved above the 1.3800 area and needs to break above the 200-day MA at 1.3840. The bias remains for a move towards the 1.3900 area on a move through 1.3850, with support down back at the 1.3670 level.

EURGBP – Still finding support at the 0.8420 area, but the lack of rebound suggests we could see a break below 0.8400, potentially opens further weakness towards 0.8280, and the 2020 lows. We have resistance at the 0.8470 level, and the highs this week, as well as the 0.8520 area.   

USDJPY – Back at the November 2017 peaks at 114.75, a break-through this level opens the potential for a move toward 115.50.  We have support at 113.80, a break of which could see a move towards the 112.40 level. 

FTSE100 is expected to open 20 points lower at 7,203.

DAX is expected to open 33 points lower at 15,490.

CAC40 is expected to open 12 points lower at 6,693.