Osborne’s Sugar High Wears Off

Osborne's Sugar High Wears Off

Osborne’s Sugar High Wears Off

March 18, 2016

As the sugar coating wears of George Osborne's budget, more and more people are questioning his numbers and his motives. The IFS disagree with the OBR have forecast for growth, despite the downward revisions from the OBR. Wage growth is the big sticking point, where the IFS say that there won't be that pick up in the coming years and that is going to mean a lighter tax take for the exchequer.

The other questionable point is why George Osborne is waiting until 2019/20 to balance the books, instead of raising taxes (or keeping them pretty static) and getting it done earlier. The cynic in me agrees with the idea that Osborne is putting off the pledge in the hope that he won't be chancellor by then and will have moved in next door, to number 10. If Cameron goes in 2019 and he takes over, he could call an early general election take the Labour Party by surprise, win, and by the time people remember what he's pledged, it's someone else's budget to manage.

In the markets, sterling has continued to recover its footing thanks to the Fed's revised 'dot plot' which now only shows two rate hikes this year and two next. The Pound, along with many others, charged higher versus the Dollar on the news. Our concern is whether the Fed will overshoot its inflation target in the coming future at the cost of keeping investors happy now.

Central Bank action is losing its shine overall, with investors seemingly weary over what all the extra money in the system will actually achieve. Stock markets in Europe, which are probably the most obvious places to get a free ride on an ECB coat tail, are struggling to gain new ground following Mario Draghi's news last week.

Banks in Europe are also questioning how effective his new Targeted Long Term Refinancing Operation is likely to be, as they say liquidity isn't their problem, it's the capital requirements that they face that are restricting their lending capabilities. Information that won't have escaped Draghi's attention, but something he can do very little about given the efforts that have gone into forcing banks to be more capital conservative. Despite saying at the press conference last week that further action didn't seem appropriate, Mr Draghi repeated his previous mantra, last night, that the ECB stands ready to use all available instruments – a pretty poor show that it only took a week him to feel he had to reassert the Bank's power, after agreeing to pump an extra €20bn into the system!

Mr Draghi's countryman, Matteo Renzi has called on the EU to allow countries to breath budget deficit rules in a bid to stimulate growth. The Italian PM might be the first of many who will start publicly leaning on the system to try and get them to allow greater spending versus income, in a bid to stimulate domestic growth over and above what ECB policies can achieve.

Overnight; China have had the strongest daily Yuan fix since November of last year, as they had to react to the weakening of the US dollar. They balanced this with a large liquidity injection into the market to keep things stable and it appears to have worked.

Looking to today's data sheet; it's pretty busy across the board. With central bank speakers, German producer prices and a wave of sentiment indexes. That could keep those at their desks busy til the closing bell, but we think the big moves should be behind us for the week now (or at least that's what we're hoping(

Have a great weekend

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