Markets
It was D-day in the UK today: Finance Minister Hunt presented the delayed Autumn Statement. The budget fell under close scrutiny by financial markets after the Truss/Kwarteng tandem unsettled them big time with their massive unfunded spending and tax cuts. Hunt’s budget was a near 50-50 mix of tax increases and spending cuts. He is seeking £55bn by a.o. lowering the threshold at which the top 45% income tax rate is levied while the other income tax thresholds and those for national insurance and inheritance tax were frozen for an extra two years. Hunt also raised the windfall tax on oil and gas companies and introduced a new 45% tax on electricity generators. These measures will raise the overall tax burden to the highest since WWII. Public spending will grow but slower than the economy and departmental budgets will have real-term spending cuts. There are supportive measures as well. There’s a one-year extension beyond April of the cap on energy bills but at £3000 instead of the previous £2500. To address the squeeze on households, the government hands out cost-of-living payments next year between £150-900. Hunt raised the national living wage by a record 9.7% and kept the triple lock in place, meaning welfare and pension payments will both increase in line with inflation. The aim of his program is to tackle inflation, get the debt ratio falling and have borrowing below 3% of GDP over time, Hunt said. The supportive measures meanwhile are expected to lead to a shallower downturn and targeted investments in energy, infrastructure and innovation should lift long-term growth. The Office of Budget Responsibility ran the numbers and projects GDP next year at -1.4%, a sharp revision from March (+1.8%) before picking up in 2024 again by 1.3% vs 2.1% seen in March. Unemployment could peak at just below 5% in two years’ time. Inflation would fall from 9.7% this year to 7.4% in 2023 (+3.3 ppts) and a mere 0.6% in 2024 (-0.9 ppts). The debt ratio will peak at 97.6% in FY 2025-26 and 2026-27 and the budget deficit would go from 2.5% FY 2023-24 to between 0.2-0.5% in the four years thereafter. UK assets traded volatile during Hunt’s budget presentation as markets try to gauge the impact. Daily changes in UK yields currently vary between +6 bps (30y) to +14 bps (2y), flattening the curve. BoE expectations have slightly been revised upwards but the terminal rate stays about the same at 4.5%. Sterling loses, allowing EUR/GBP to rebound from 0.8721 support to 0.876 currently. GBP/USD loses more than a percent to 1.178 amid broad dollar strength.
The greenback was already a bit better in shape today after the recent sell-off before Fed’s Bullard give a little push in the back extra. He said rates needed to be raised further, adding that current tightening only has had a limited effect on observed inflation. According to the monetary Taylor rule, 5% is the bare minimum. Bullard is just the most recent one in a series of Fed governors clearly pushing back against the hefty market repricing. EUR/USD dips to 1.032 after meeting resistance from the 1.04 big figure and the 200MdA. DXY climbs from an intraday low at 106.1 to 107. Core bonds pared some of their gains over the previous days with USTs underperforming in the wake of Bullard’s comments. US yields rise 8.1-8.5 bps in the 2y-10y bucket. German yields add 1.6 bps (30y) to 4.5 bps (5y) with the 10y trying to settle north of 2% again. Equities drop a little over 1% in Europe and the US.
News Headlines
Bloomberg cites people close to negotiations between the EU and Hungary. They suggest that the EC won’t issue its verdict on Hungary’s investment and reform proposals at the planned November 22 EC meeting. That leaves little time before the final gathering on December 6 to evaluate the proposals. Budapest sent those to end a rule-of-law dispute and unfreeze recovery funds related to the pandemic. Without EC approval by the end of the year, Hungary loses 70% of the pre-allocated funds (€4.1bn). The EC currently prioritizes an aid plan for Ukraine (€18bn) and a proposal for a minimum corporate tax rate. Both dossiers are being held hostage by… Hungary. The forint loses more ground today with EUR/HUF testing previous support (now resistance) at EUR/HUF 416.
Ukrainian infrastructure minister Kubrakov said that the initiative for safe transportation of agricultural products across the Black Sea has been extended for another 120 days. The deal between Ukraine and Russia is overlooked by the UN and by Turkey and also known as the grain export agreement. The initial deal took effect on August 1 and helped alleviating the global food (price) crisis. Ukraine is still pushing for a one-year extension and to include ports in the Mykolayiv region in addition to ports in the Odesa province.
