Hey guys, welcome back to Market Macro Hub!
Last week was an extremely significant week economically for the Uk, CPI data, the Autumn Statement, retail sales and even the unemployment figures for Sept.
In this piece we break down the ‘alpha’ announcements from the autumn statement and Uk’s market reaction:
Enjoy
Building The Uk Back (With Higher Taxes…)
We’ll start where it hurts the most, (for some). Income Tax.
Last week Thursday Jeremy Hunt delivered his Autumn budget covering his fiscal policy plans to bring growth and attraction back to Uk’s financial markets.
The most notable change to the higher income earner in the Uk was the reduction of the £150,000 threshold at which taxpayers start paying the additional rate of 45% to £125,140. For those within this income bracket, discussions on whether a ‘salary sacrifice’, as a means to reduce taxable earnings, have been floating around as workers weigh up the viability of doing so.
To bring this into reality, previously, a Uk employee not of retirement age earning £125,140 would take home roughly* £80,227.08 per year.
A breakdown of the current tax year 6 April 2022 to 5 April 2023:
The result of this hike is that millions more people will be brought into the higher or additional tax bands contributing to the government's need to raise revenue from income tax.
Other noticeable changes worth noting:
CGT (Capital Gains Tax) annual exemption will reduce from £12,300 to £6,000 from April 2023, then to £3,000 from April 2024
Stamp Duty Land Tax cuts will remain in place only until the 31st March 2025
The dividend tax allowance will be reduced from £2,000 p/y to only £1,000
What Did The Markets Have To Say?
Well, since the removal of our beloved Kwasi Kwarteng, you can see the bond market has been in favour of Jeremy Hunt. Lower yields are generally associated with lower-risk investments, as opposed to bonds of high yields, commonly known as junk bonds/non-investment grade. A brief reminder that fiscal policy changes can have drastic effects and influence on domestic markets; after the mini-budget, you may recall one of the globally renowned rating agencies Fitch lowered Uk’s bond rating:
As aforementioned in a previous article, the rating score of a sovereign bond hugely affects the liquidity available to that economy when financing projects/raising debt. Simply put, the catch is, the lower the investment grade the bond is, the less allocation an institution is allowed to make, due to risk levels associated with the investment. So for sovereigns, a simple downgrade from AA+ to AA- (Fitch rating)significantly increases the perceived risk associated with that country and restricts the capital they can raise as banks/pensions funds/institutions have to rethink their portfolio allocation due to the creditworthiness and rating changing.
Hence the massive shake-up in the bond market we had in September. This is due to the Basel III Liquidity Coverage Ratio requirement formed in Switzerland, Basel 2010 and introduced in 2015 globally; after the banking crisis of ‘08 when banks didn’t have enough high-quality liquid assets on their balance sheets to meet immediate liquidity requirements.
This is all to emphasise the importance fiscal policy adjustments have when looking into the world of global macro, it’s an easy thing to overlook; especially within your domestic market talk less of globally. I’m an example of that, however, to build depth and broad knowledge within global macro this plays into your investment framework.
Here’s my personal viewpoint on Jeremy Hunt’s decision to end the stamp duty land tax; although it seems like a reasonable thought process and policy decision to make at first glance. But, putting a deadline on when you can benefit from reduced/no stamp duty (depending on the home price) surely means inflationary pressure on the housing market in the Uk? This is additional inflation pressure to a housing market already at historically all-time highs when looking at the affordability metric, average household income vs home price.
Alarming?!
With the deadline in place for 2025, and mortgage rates set to experience volatility both to the upside and downside I’m afraid that we may keep house prices elevated as both first-time buyers and homeowners looking to benefit from the possibility to save on the SDLT reduction.
Here’s how the current SDLT policy is looking:
I’ll have my eye on Uk home sales in the upcoming months to see what effect this may or may not have when it comes to additional inflationary pressures on the brittle housing market here.
As for now, thanks for reading this note ;)
Friday we’ll be looking at the Euro Zone crisis and the source of the banking crisis.
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Until next time