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For more on today’s Budget, click here: Surprise tax cuts from Chancellor Brown
We almost feel sorry for the Chancellor this morning.
OK, that’s an exaggeration – we feel nothing of the sort, but it can’t be terribly pleasant to know that when he’s standing at the dispatch box, delivering what he hopes is his swansong Budget and legacy speech, most of his erstwhile colleagues sitting behind him will be cracking ‘Uncle Gordon’ jokes about their very own ‘Stalinist’ frontbencher.
Once upon a time of course, plenty of Labour MPs would have been more than happy to have had Stalin running the party. And we’re sure that Uncle Gordon would love to send whole swathes of them to the gulags once he’s got the Prime Ministership safely in his grasp.
But in any case, we can’t see that lot having much impact on the Budget (you can read what we expect from today – not a great deal – in Monday’s Money Morning: What will Brown’s last Budget have in store?).
Of more lasting concern are yesterday’s inflation figures…
UK inflation – surprise, surprise – came in higher than analysts were expecting yesterday.
The consumer price index rose by 2.8% in February on last year – that’s the second-highest reading since CPI records began, and up from 2.7% in January. More worryingly, the retail price index (the one that arguably reflects the cost of living best, and the one that people prefer to look at when talking about pay increases) hit 4.6% annual growth, the highest since 1991.
Just for comparison, when RPI was last at 4.6%, the base interest rate was 11%. It’s currently at 5.25%. So the real interest rate in the UK (the interest rate minus RPI growth) is currently 0.65%, compared to 6.4% then – nearly ten times higher. As Edward Hadas puts it on Breakingviews, “real interest rates are still much too low to cool down housing speculation or wage pressure”.
As for the reasons behind the rise, most commentary focused on the hike in airline duty. This had a big effect, certainly, but there was no comfort to be had from the rest of the data. Most things are more expensive than last year, from insurance, to food, to more worryingly, household goods and furniture, where retailers have usually struggled in recent years to raise prices. In fact, CPI would have been higher, were it not for cheaper petrol and computer games – hardly reassuring.
Kate Barker, one of the members of the interest-rate-setting Monetary Policy Committee felt moved to warn companies – who have consistently expressed optimism on raising prices – that they would be monitoring the situation ‘particularly closely’.
But it’s no wonder companies are optimistic about raising prices. All we hear, day in, day out, is about how rich we all are. The papers are filled with nothing but nattering about bonuses, the gap between the haves and the have-yachts, and the difference between being a high net worth individual and an ultra high net worth individual (roughly speaking, as far as we can work out, multimillionaires with less than £5m in liquid assets are HNWs while those with more are UHNWs, though definitions seem to vary from marketing department to marketing department).
Magazines are chock-full of ads aimed squarely at people with more money than taste, to the extent that the typical consumer glossy now contains almost as many pages as the tax bible, to which Uncle Gordon keeps adding.
Of course, it’s hard for mere mortals further down the food chain from Russian oligarchs and investment bankers to work out exactly how everyone is apparently so wealthy, and yet our taxes, bills and now general living costs just keep on rising faster than our incomes. We’ve more on this wealth divide in the latest issue of MoneyWeek, out on Friday.
But one thing’s for sure – inflation isn’t going away any time soon, which means further interest rate hikes. And that means life will be getting even more expensive for most of us in the not-too-distant future.
Turning to the stock markets…
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In London, M&A activity and early gains on Wall Street lifted the blue-chip FTSE 100 index to a close of 6,220, a 30-point increase. Leisure group and latest private equity target Whitbread was the day’s best performer with gains of over 11%, whilst life insurer Friends Provident was the biggest faller on below-expectation results. For a full market report, see: London market close.
Elsewhere in Europe, stocks tracked their US counterparts higher. The Paris CAC-40 ended the day 44 points higher, at 5,503, whilst the Frankfurt DAX-30 closed 28 points higher at 6,700.
Across the Atlantic, stocks were also boosted by merger news. The Dow Jones closed 61 points higher, at 12,288, with support coming from the likes of Exxon-Mobil, Caterpillar and Wal-Mart. The tech-rich Nasdaq ended the day 13 points higher at 2,408. And the broader S&P 500 closed 8 points firmer at 1,410.
In Asia, the Nikkei ended the day 153 points higher at 17,163.
Crude oil had climbed to $59.46 this morning and Brent spot was at $60.48 in London.
Having hit a two-week high of $660.60 in New York yesterday, spot gold had eased to $659.50. Meanwhile, silver had risen to $13.32.
And in London this morning, the UK’s third-largest bank, Barclays Plc, and Dutch Bank, ABN Amro Holding NV agreed some of the initial terms for what is set to be the largest financial services takeover in history. Statements today revealed that the CEO of the new company would be nominated by Barclays and the chairman by the ABN Amro board, and shares would mainly trade on the London stock exchange. Barclays shares had risen by as much as 1.6% this morning, whilst ABN Amro‘s stock had climbed 1%.
And our two recommended articles for today…
Electric investment opportunities in the power sector
– The end of the age of oil need not mean disaster, says Kevin Kerr. In fact, the search for alternatives has thrown up a wealth of investment opportunities. And with worldwide electricity demand set to soar as China and India hop on the power grid, now is the time for investors to get on board. For more on how to power up your portfolio with energy investments, see: Electric investment opportunities in the power sector
Top stockmarket trends for Spring
– The US stockmarket has reached a major milestone, says Jim Stanton. That means it’s time to sit back, read the charts and try to predict what will happen over the coming months. To find out which indices to watch for clues and whether we’re in for a long drawn-out decline, read: Top stockmarket trends for Spring