The UK Budget

The Chancellor’s Budget (12.30 tomorrow - Wednesday) is likely to be broadly revenue neutral. Further tax increases may yet be required to put the public finances back onto a more sustainable footing, but even without them, it is clear that the enormous fiscal boost to the economy seen over the last five years is now giving way to a period in which the public sector is likely to act as a major drag on both economic activity and inflation. This should come as little surprise, but any hint of more limited issuance of Government debt (perhaps linked to privatization of the student loan book), or slower economic growth, may still be positive for sentiment in the gilt markets.

MPC Minutes

The minutes to March’s MPC meeting are likely to show another split vote, with a number of members remaining concerned about high headline CPI inflation, strong M4 growth and continued asset price inflation. This would support the view that interest rates will rise in April or May. The minutes to February’s meeting showed that Tim Besley and Andrew Sentance both voted to follow January’s interest rate hike with another immediate increase. Although the recent falls in equity prices may have made these members less inclined to vote for higher rates in March, it seems unlikely that they would abandon their call for higher rates altogether. At the very least, then, they are likely to restate their concerns about the medium-term inflation outlook. 

Meanwhile, it seems unlikely that any other members voted to raise rates in March, preferring instead to wait for more evidence of the impact of past increases. Looking ahead, though, it must be remembered that the February Inflation Report gave a very strong signal that rates needed to rise at least once more. Bottom line: With the latest data taking a stronger tone, it is unlikely to be too long before a majority of the MPC vote for a hike.

The Big Picture  

The recent rebound in G7 equity markets is welcome, but has done little more than stabilise them at levels significantly lower than seen in February (see chart)

This helps clarify the impact of Chinese markets. The 9% fall in the Shanghai market on 27th February was regarded as a key trigger behind the initial fall in G7 markets. But it was always hard to see any fundamental link here, and this has been confirmed by subsequent events: Chinese markets have now recovered to close to their February highs whilst G7 markets remain at a substantially lower level! 

The absence of further unpleasant revelations about the US sub-prime market over recent days has been positive. Given the uncertainty about the scale of the default problem, it is not surprising that in the short term the prevailing attitude is that ‘no news is good news’.  But even if the sub-prime problem has only limited contagion effects on other parts of the financial sector, the big picture remains the slowing US economy. The US NAHB Housing Market Index fell back again this month, suggesting that housing market sentiment is still weak, but equity markets appeared unconcerned. Reduced demand from sub-prime borrowers will only weaken it further. The impact of a slower rate of housing construction is likely to reduce substantially the rate of employment growth ,and we can continue to expect disappointing growth indicators and corporate earnings over coming months. Bottom line: Global equities are not out of the woods yet!

And finally…………………. 

From British newspapers (3) 

At the height of the gale, the harbourmaster radioed a coastguard and asked him to estimate the wind speed. He replied he was sorry, but he had lost his gauge. However, if it was any help, the wind had just blown his Land Rover off the cliff.

( Aberdeen Evening Express)
 

Mrs. Irene Graham of Thorpe Avenue, Boscombe, delighted the audience with her reminiscence of the German prisoner of war who was sent each week to do her garden. He was repatriated at the end of 1945, she recalled.

"He'd always seemed a nice friendly chap, but when the crocuses came up in the middle of our lawn in February 1946, they spelt out 'Heil Hitler.'

( Bournemouth Evening Echo)

Prometheus from sources: ADM, Barclays Capital, Cazenove, Charles Stanley, HSBC, ING, SocGen, UBS.