In Focus: Sunak’s Five Point Plan, Fed Minutes and US PMI

Sunak's Five Point Plan

Yesterday afternoon, the PM delivered his first major speech of 2023, outlining five primary priorities for the year ahead. This comes as the government tries to restore credibility ahead of the next general election, which is to be held no later than 25 January 2025. Of course, Sunak's first major speech of the new year follows a year which saw the departure of two PMs, along with 145 other government resignations and sackings. As the public and markets digest his speech, his five points are detailed and explored below.

> Inflation

The Prime Minister’s primary priority was of little surprise to the public and markets, as he expressed his target to help bring down inflation stating that “first, we will halve inflation this year to ease the cost of living and give people financial security.” Headline inflation in the UK currently stands at 10.7%, having come down from October’s peak of 11.1%, and thus a halving of inflation would see the rate fall to 5.35% - still putting it more or less inline with the relatively high levels of inflation experienced in 2008. Currently, the OECD expect that inflation will remain above 9% in early 2023 before slowly easing to 4.5% by the end of the year, thus Sunak’s commitment to bring it to 5.35%, gives him some room vis-à-vis general market expectations.

> Growth

Sunak’s second commitment was a pledge to “grow the economy, creating better-paid jobs and opportunity right across the country.” This comes as only recently, the Bank of England forecasted that the UK would go into eight consecutive quarters of economic contraction, while the country is expected to have the second lowest growth amongst the G20, coming behind Russia. This also comes as business investment fell by 2.5% in quarterly terms, over Q4 2022, though the UK’s service sector did see modest growth at the back end of last year.

> National Debt

Thirdly, the PM vowed to “make sure our national debt is falling so that we can secure the future of public services.” Of course, the servicing of the UK’s national debt took a number of major hits last year given that some 25% of the country’s debt is linked to RPI, while Kwarteng’s mini budget sent bond yields soaring. The UK’s current debt-to-GDP stands at 97.40% and further economic downturn may see this figure increase given the negative multiplier effect, as government tax receipts dry up on slow growth and reduced household spending. Hence, brining down the UK’s £2tn in government debt will be no easy feat, particularly as Union’s show little sign of capitulating on their demands for higher pay. 

> NHS and Channel Crossings

Away from the economy, fourthly, Sunak committed to bring down NHS waiting lists and finally also committed to “pass new laws to stop small boats, making sure that if you come to this country illegally, you are detained and swiftly removed.”

Hence, Sunak’s commitments will be no easy feat given the wider economic landscape of the UK. Slow growth and lower public spending may help to ease inflation but will ultimately make it harder for the Treasury to bring down the budget deficit and sovereign debt.

US ISM PMI Comes In Below Expectation

While yesterday’s ISM manufacturing PMI figures came in only marginally below expectation (48.4pts against 48.5pts), it nonetheless represents a further contraction for the US manufacturing sector, despite falling energy prices and better than expected growth in the final quarter of last year. New orders showed a significant decline, indicative of how uncertainty over the near-term future of the US economy is manifesting itself in a decline in demand.

FOMC Minutes

Yesterday evening saw the release of the Fed’s minutes for their December 2022 meeting, which involved them raising rates by 50bpts to 4.5%. In a similar fashion to the last meeting’s minutes, the Fed are remaining resolute in their desire to see inflation come down before they turn the tide on rising rates. Such comments saw the dot plot’s terminal rate rise from around 5% to 5.25% as markets reacted to the rhetoric of further rate hikes over the coming months.

The minutes stated that “participants generally observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2 per cent, which was likely to take some time”.

Going into the release, stock markets across the US had been rallying to the tune of around 1% on the day, however the hawkish tones from the minutes saw a slight sell off leading to a close of 0.8% for the S&P and 0.7% for the Nasdaq.

Today in Focus

Today will see the release of ADP employment figures where the general market consensus is expecting a print of 150,000 – a slight increase from last month’s print of 127,000. This signal of the health of the US labour market comes as a prelude to Non-farm payrolls on Friday where markets will be keen to see gain some insight into the labour market, given its inflationary pressures.

Today will also see the release of Italian CPI (exp. 11.6%) and the US’ Goods and Services Trade Balance for November (exp. -$74bn).