Subject: Tough Week for the Chancellor ... ?

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Saturday 22nd October 2016
Hi Friend,
Tough week for the Chancellor ...
Borrowing blips in September ...
Public Sector borrowing in September was £10.6 billion compared to £9.3 billion in the prior year. For the year as a whole the deficit was £45.5 billion compared to £47.7 billion in the first half of last year. The out turn was much worse than expected. A disappointment to Treasury officials as they polish up the Autumn Statement due next month.

In August, it was all so different. Revenues were increasing as spending was held under tight control. We were confident for the year borrowing would fall to around £65 billion. Now it would appear £70 billion will be a tough target for the financial year. The OBR had been projecting a fall to around £55.5 in March this year. Expect a significant revision to borrowing in the OBR revised forecasts due next month.

Is the September figure just a blip? Highly probable! Tax receipts in the month were up by just 2.6%. Sluggish VAT receipts and a fall in corporation tax revenues were to blame. The ONS was at a loss to explain the drop in corporation tax revenues by almost 9%. Either way, the Chancellor will have little to give away in the Autumn statement. Hopes of a significant infrastructure boost have already been suppressed. The latest borrowing figures will ensure shovels, at the ready, will be back on the rack.
Prime Minister sees red ...
The Chancellor also received a put down from the Prime Minister this week. Phillip Hammond had suggested student numbers should be taken out of the immigration stats. A logical and total sensible proposal endorsed by the further education sector. According to the Daily Express, Downing Street mandarins were gripped by 24 hours of confusion over what the Government's official policy was. Mrs May is said to have personally stepped in to veto the change in policy. The Lady sees red and sensible proposals to address the immigration issues are dead.

Last week, we warned inflation is set to rise significantly and within months. We didn't have long to wait. The ONS released the latest inflation figures on Tuesday. Headline CPI inflation increased to 1% in September. Service sector inflation moderated slightly to 2.5%. The rate of fall of goods prices slowed to -0.5%. Manufacturing output prices increased to 1.2% as import costs increased by over 7%. Expect further rises in the months ahead, with a significant rise in the first quarter next year. Faced with rising costs and a tough pay round, businesses will have some difficult pricing decisions as the "Marmite" debate demonstrates. 
So what of earnings and employment ...
The latest earnings data continue to suggest earning are subdued despite the strength of the jobs market. Overall earnings growth was just 2.3% despite near wage 5% growth in the construction sector.

The claimant count in September was 776.4 thousand, a rate of 2.3%. The number of vacancies in the economy was almost 750,000. The number of jobs available equals the number of people on the claimant count register. That's near full employment. The number of people in work increased to 31.8 million, up by 460,000 compared to last year. The unemployment rate fell to 4.9%. That's lower than pre recession levels in 2007/8. Earnings are set to rise as the job squeeze continues and real earnings are put under pressure. An interest rate rise would trigger the earnings increase. Life on Planet ZIRP has many strange effects, including subdued earnings growth.

Retail Sales data was also released this week. Volumes increased by 4.1% in September as values increased by 2.9%. On line sales volumes increased by 22%. The proportion of internet sales increased to 15% in the month. By 2020, we expect 20% of non fuel retail sales to be on line. It's a huge squeeze on high streets and retail parks. Lidl is facing the squeeze as Tesco fights back. What would happen if Marmite was offered direct at the push of a button, or a call from the fridge? Love it or hate it, digital disruption and the internet of things offer further big changes in the years ahead in the retail sector and elsewhere.
So what happened to Markets?
Markets, were down slightly - The Dow closed at 18,109 from 18,212. The FTSE closed at 7,020 from 7,044.

Sterling was steady against the Dollar to $1.221 from $1.220 and up against the Euro to €1.123 from €1.110. The Euro fell further against the Dollar to 1.087 from 1.099.

Oil Price Brent Crude closed at $51.67 from $51.69 The average price in October last year was $48.43.

UK Gilts - yields moved down slightly. UK Ten year gilt yields closed at 1.07 from 1.10. US Treasury yields moved to 1.74 from 1.70. Gold closed at $1,265 from $1,251.


John

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