Yesterday's UK public finances data for July were really disappointing, revealing a further increase in borrowing when a net repayment had been expected. The position the UK finds itself in is difficult to say the least. Global and domestic economic conditions are weak which in turn is dragging down tax revenues increasing cyclical spending.
Is now the time then that the UK should spend even more? Investment on big infrastructure projects will support growth and employment; tax cuts would support increased spending and a reduction in red tape would encourage investment. So why not?
Well, by spending more and taxing less sounds like the situation will get worse. Yes, reducing red tape and taxation would likely produce a long term rebound in economic activity, but would almost certainly lead to a sharp increase in borrowing in the next couple of years. There would also be a sharp increased risk of ratings downgrades. For the foreseeable future, further monetary loosening seems the only realistic prospect for stimulating faster growth in the UK.
Despite this, Sterling's day went better than might have been expected as Sterling hardly flinched. On the day Sterling is lower by half a cent against the resurgent Euro but elsewhere it is unaccountably firmer; half a cent up against the US Dollar and a cent or two against the commodity dollars.
The Euro's good performance was entirely founded on sentiment. There was no data to justify the Euro's rise other than Spain's auction of 12- and 18-month treasury bills. The Spanish treasury raised a total of €4.5bn at sharply lower rates of interest than it managed at the previous auction two months ago.
There isn't much on the data calender today so attention will be on the US Federal Open Market's Committee meeting minutes. The question remains what the Federal Reserve intends to do about the looming fiscal cliff, since it is unlikely the US's recovery is as yet self-sustaining.
The Fed have shown reluctance for further quantitative easing, but any substantive cuts in government spending would likely undermine the recovery that is underway and we can expect tax hikes to play their part.
With so little released today, recent improvements in risk appetite are likely to continue.
Conceived with Ambition