Autumn budget outlined for the UK

• Chancellor Hunt delivered the expected mix of tax hikes and spending cuts worth almost GBP 55bn in the Autumn statement yesterday, and both gilt yields and the pound were little changed on the day. Much of the tax hikes were in the form of fiscal drag – where tax thresholds have been frozen meaning more people are dragged into higher tax payments over time. The threshold for the highest 45% income tax band was reduced to GBP125k from GBP 150k previously and exemption allowances for dividends and capital gains have been reduced sharply from 2024. The windfall tax on energy companies’ profits has been increased to 35% until 2028 and electricity producers will face a 45% levy as well. Spending on the NHS, education and infrastructure will be increased in nominal terms but will likely not be enough to meet demand growth. Other government departments such as justice, transport and the home office will likely face spending cuts in real terms in the coming years.
• Overall, the OBR expects average household incomes will fall by 7% over the next two years, undoing most of the gains in living standards since the financial crisis. The tax burden (tax revenues as a share of national income) will be the highest since the WW2 at 38%.
• Much of the fiscal adjustment is only set to come into effect after the next election in 2024, meaning that some of the planned changes may be reversed before they actually happen, if economic conditions allow. The government has also given itself five years to meet its fiscal rules, rather than three. Nevertheless, the UK economy is expected to contract by -1.4% in 2023 and then recover 1.3% in 2024 with growth set to accelerate in 2025 and 2026.
• Overall the package is likely to mean the Bank of England will need to keep raising rates in the near term to bring inflation back down next year, with a 50bp hike expected in December and at least another 100bp of hikes likely in 2023.   
• US housing starts fell by more than expected in October, down -4.2% m/m against expectations of a -2.0% decline. However the September data was revised higher. The main driver was a decline in single family homes which fell to the lowest level of starts since May 2020. Homebuilder sentiment remained weak as mortgage rates remain high.
• Fed officials continue to push back against market expectations of a “pivot” following better than expected CPI and PPI data over the last couple of weeks. St Louis Fed President Bullard said he has raised his forecast for the terminal Fed Funds rate to 5-5.25% from 4.75-5% previously and indicated there was upside risk to his new forecast. Neil Kashkari offered similar hawkish commentary saying he needed to be convinced that inflation has peaked.  The Fed will publish new interest rate projections following the December meeting. 
• Initial and continuing jobless claims reported overnight came in lower than forecast, despite headlines in recent weeks about significant tech firm layoffs and staff cuts. The data suggests the labour market remains in good shape overall, even has the economy has slowed and borrowing costs have risen.

Key Economic Data and Events

• 19:00 US existing home sales (Oct) forecast 4.4mn (-6.6% m/m)
• 19:00 US leading index (Oct) forecast -0.4%

Fixed Income

• US Treasuries sold off overnight in response to comments from St Louis Fed president, James Bullard, who is now pitching the terminal Fed funds rate to 5-5.25% at a “minimum level.” Yields on the 2yr UST added almost 10bps in response, rising to 4.452% while the 10yr UST yield climbed by 8bps to 3.7657%.
• Gilt yields moved higher following the release of UK autumn budget statement but as chancellor of the exchequer Jeremey Hunt outlined that much of the tightening in fiscal policy will be delayed for two years, the sell off was not particularly calamitous. Yields on the 2yr gilt rose more aggressively, up 11bps to 3.054% while 10yr gilt yields settled up 5bps at 3.189%.  

FX

• The dollar was higher against peer currencies overnight, following on the move upward in Treasury yields. EURUSD dropped by 0.3% to 1.0362 while GBPUSD dipped by 0.4% on the close to 1.1864, having moved slightly worse during the day but recovering late in the session as markets digested the impact of the UK government’s new fiscal stance. USDJPY moved back up above 140, rising by 0.5% overnight.
• Commodity currencies were more mixed with USDCAD holding flat on the close while AUDUSD dropped by 0.8% to .0.6685 and NZDUSD fell by 0.4% to 0.6129.

Equities

• The comments from James Bullard helped deflate optimism in the US equity markets, where all three major benchmarks closed down. While the Dow Jones was almost flat (down just -0.02%), losses on the S&P 500 (-0.3%) and the NASDAQ (-0.4%) were larger, although still fairly modest compared to the level of swings seen in recent months.
• European markets were mixed as the DAX added 0.2% while the CAC lost -0.5%. The UK’s FTSE 100 dropped -0.1% with little significant move from the Autumn statement.
• Locally, the DFM dropped -0.3% and the ADX -0.6%. Saudi Arabia’s Tadawul closed down -0.1% and Egypt’s EGX 30 added 1.4%.

Commodities

• Oil prices fell sharply overnight, declining for a second day running and setting markets up for a weekly decline. Brent futures fell 3.3% to USD 89.78/b and WTI dropped by 4.6% to USD 81.64/b. There were few fundamental catalysts affecting the market in the last several days apart from the rising fears that 2023 will be particularly tough for the global economy and thus for oil demand.

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