Reaganomics works only when conditions are ripe for it

Outlook: The top news today is the new budget in the UK that is an effort at Reaganomics. It was extremely badly received, driving the 10-year yield up to above the US level for a while and causing sterling to crash to a little over 1.1000. It had been 1.1720 only ten days ago. The crux of the matter is the new costs--the Debt Management Office raised the bond sales plan for 2022-23 by £62.4 billion to £193.9 billion, more than the expected £60 billion increase.

Rate hike expectations–dashed this week when the BoE did only 50 bp–are back, possibly 100 bp at the Nov meeting and 300 bp or more over the next 12 months, according to some analysts. This would take the overnight UK rate above the US rate but is not helping the pound.

Why not? Timing. When people are starting to hunker down for a bad, cold winter is not the time to invite them to a beach party. The implication is that Reaganomics works only when conditions are ripe for it, and with a lead-up. After all, Reagan campaigned on the issue and it was not surprise when it came. So far the market judgment is that PM Truss is blind and tone-deaf to the people. We are not so sure. Some of the grimness can come from the personal--her unpopularity and less than suave and poised appearances.

In the US today, we get the S&P PMI, likely to show manufacturing down to 51.0 from 51.5 and services up to 45.5 for a composite up to 46.1. As noted before, the ISM numbers tend to reflect the economy better than the S&P version, but never mind–the point here is that the PMI will not be seen as signifying immediate recession or horribly bad for the dollar.

We are deeply concerned about the continuation of the dollar rally, already more than 20% and gaining even more today. It’s excessive. Forecasts from respectable people see sterling below the old low at 1.0520, the euro down around 92.50 cents, and heaven only know where the yen will go–150? Excessive moves like this end in tears.

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