Chancellor unveils UK budget

The UK’s Chancellor of the Exchequer, Jeremy Hunt, unveiled his budget yesterday afternoon, the UK’s first in 18 months. Some key points included the extension of the energy price guarantee at GBP 2,500 until July, and a confirmation that the corporation tax rate would be raised from 19% to 25% in April, although firms will be able to offset investment against their tax bills. The Chancellor also announced the creation of 12 investment zones in eight different areas of the country, with each one backed by GBP 80mn, in order to drive the governemnt’s levelling up agenda. Extra funding will be available for childcare as the government seeks to boost the workforce but there was nothing about pay for public servants, many of whom have been striking in recent months. A fuel duty freeze will be maintained. The annual tax-free allowance for pensions was raised from GBP 40,000 to GBP 60,000 while the lifetime limt was scrapped. In terms of forecasts, inflation is predicted to come down to 2.9% by year-end and while the UK might avoid a technical recession of two consecutive quarters of contraction, GDP over 2023 would be 0.2% smaller than in 2022 according to the ONS.

US retail sales contracted 0.4% m/m in February, in line with expectations. Meanwhile, the January figure was revised up from 3.0% to 3.2% growth. Stripping out petrol and autos, sales were flat m/m. Eight out of the 13 categories measured saw a fall in spending. Sales at restaurants and bars fell 2.2%, suggesting that the persistent price rises in the services sector are starting to weigh on expenditure, in a potentially positive signal for the Federal Reserve. Another positive indicator for the Fed came from a fall in the producer price index, which dropped 0.1% m/m, compared with expectations that PPI inflation would come in at 0.3%. Core PPI was flat m/m.

Markets were roiled by more unease in the banking sector yesterday as Credit Suisse came under pressure when regulatory issues prevented backer Saudi National Bank from providing more support. Later in the day the Swiss central bank and the regulator provided a statement saying that there would be emergency funding available if necessary and that ‘Credit Suisse meets the capital and liquidity requirements imposed on systemically important banks.’ The bank will borrow up to CHF 50bn from the Swiss National Bank.

Today’s Economic Data and Events

• 16:30 US initial jobless claims, week to March 11. Forecast: 205,000
• 17:15 ECB main refinancing rate, %. Forecast: 3.50%

Fixed Income

• Benchmark government bonds soared overnight as markets sought the safety of haven assets amid the unfolding instability in financial markets. Concerns over the stability of Credit Suisse pushed the 2yr German yield down 48bps to 2.369% while French and Italian bonds also spiked. In the US, yields on the 2yr UST sank 36bps to 3.8874% while the 10yr yield closed lower by 23bps at 3.4548%.
• Markets are now pricing in nearly 100bps of cuts in US rates by the end of the year albeit after one more 25bps hike that is priced increasingly for the May FOMC rather than next week’s meeting. Markets have also downgraded their expectations for the ECB’s decision today to a 25bps hike in light of the volatility, rather than the 50bps that ECB officials have been calling out for.
• Pressure has increased on emerging market bonds with sell-offs in local currency markets picking up overnight. South African 10yr bond yields added 14bps to 11.304% overnight while Turkey 10yr yields added 2bps to 10.95%. The current volatility represents an unwelcoming issuing environment so we would expect few new bonds to come to market.

FX

• It was a hunt for havens in currency markets overnight as investors ran from any risk positions. The US dollar got an enormous boost with the DXY index up 1% overnight. That gain largely came at the expense of EURUSD which dropped by 1.5% to 1.0577 was markets increasingly discounting how aggressive the ECB can be in its rate hikes going forward. GBPUSD dropped by 0.8% to 1.2057 while USDCHF spiked 2% to 0.9333 as the normally havenesque Swiss franc suffered from financial stability concerns in its home market. USDJPY showed the appeal of the yen as a haven, however, and fell by 0.6% to 133.42.
• Commodity currencies were battered as well with USDCAD adding 0.6% to 1.3768 while AUDUSD dropped 0.9% to 0.6619 and NZDUSD fell 0.8% to 0.6188.

Equities

• The day started fairly positively in East Asia as greater confidence around the situation in the US banking sector fed through from the preceding day. The Hang Seng ended the day 1.5% higher while the Nikkei closed flat.
• However, renewed concerns around major banks in Europe weighed heavily on European indices later in the day, with sharp losses across the board but especially in the banking sector. The FTSE 100 saw its biggest drop in over a year as it lost 3.8%, while the DAX and the CAC lost 3.3% and 3.6% respectively.
• In the US, the NASDAQ managed to close up 0.1%, but the S&P 500 lost 0.7% and the Dow Jones 0.9%.

Commodities

• Oil markets are showing signs of a disorderly sell-off with markets down three days in a row by large amounts. Brent futures fell 4.9% overnight to USD 73.69/b while WTI fell more than 5% to USD 67.61/b, falling into the USD 60s for the first time since 2021.
• The IEA kept its oil demand forecasts for 2023 almost unchanged in its March update, revising demand growth higher by 100k b/d thanks to higher expectations for consumption in China. The supply growth forecast was upgraded more substantially, up by 300k b/d from its previous forecast, as Russian output has been holding up better than the IEA had initially expected. The IEA expects output from Russia to decline by the end of the year but new markets have been found to offset the EU embargo on Russian crude, helping to keep export flows nearly on par with pre-war levels. The agency projects a surplus in oil markets persisting for all of H1 2023.
• Numbers from the EIA showed a modest build in crude stocks last week—up 1.6m bbl—while gasoline and distillate inventories fell. Oil production was unchanged at 12.2m b/d.