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UK autumn budget in focus

Chancellor Jeremy Hunt leaving No.10 Downing Street

European markets struggled yesterday, unable to shrug off the concerns over the missile explosion in Poland that killed two people, with tensions remaining high on concerns that an escalation might still be a very real risk.

US markets also came under pressure after a disappointing quarterly update and outlook from Target, which clobbered the retail sector, as well as knocking the wider market lower. Several more Fed speakers also added to the mix, with comments from New York Fed president John Williams, Mary Daly of the San Francisco Fed, and Feb board governor Christopher Waller, who reiterated his weekend comments in Australia, while also confirming he would be open to a 50bps rate hike next month.

As we look ahead to today’s European open, the main focus will be on Westminster and chancellor of the exchequer Jeremy Hunt, as he delivers the long-anticipated autumn statement. Over the past few weeks, we’ve heard an array of estimates of the size of the fiscal black hole at the heart of the public finances, ranging from £40bn to £55bn, however this week we got a new one in the form of a higher number, this latest one being £70bn, begging the question as to how big the fiscal hole is.

While we know a good proportion of this is due to higher borrowing costs due to high inflation, as well as the potential for a slowdown in the UK economy, it seems odd that the size of the hole has gone up at the same time UK gilt yields have gone down, along with natural gas prices. Yesterday the UK 10-year gilt yield fell to its lowest level since 16 September, likewise 2-year gilt yields, to a level when the term 'black hole' referred to objects in outer space.

This would suggest that, as Bank of England governor Andrew Bailey admitted yesterday, that most of the risk premium from the events in September has come out, which means there is little if any need for a punishing budget. If he is correct in that assessment, it would suggest that the chancellor probably has more wriggle room when it comes to laying out a long-term plan to address the challenges facing the UK economy.

The problems are certainly not something that can be resolved over the next two to three years, but require a much longer time horizon, given the challenges posed by the energy transition. Most sensible investors would understand that, which makes the almost masochistic desire to impose further pain on the economy in today’s budget an incredibly risky approach, at a time when inflation is already at a 40-year high. It’s almost as if in trying to repair the damage of the Truss budget, Hunt is overcompensating, when a middle ground would be more appropriate.

In delaying the budget until now with nary a murmur from the markets, the government may have the opportunity to be bolder when it comes to helping business, and not hammering it with new taxes. While a lot of what is to come today is likely to depend on what the OBR’s economic forecasts say, it should also be noted that the OBR’s recent forecasts have been about as much use as a chocolate fireguard. There are simply too many variables for any forecasts to be remotely accurate, and while economists have many varying models, they are only as good as the data that gets put into them.

What we do know from the experiences of last decade, is that in implementing tax rises and significant spending cuts in the wrong areas, is the wrong approach heading into a recession. Get today wrong, and Hunt runs the risk of making matters worse for the economy.

The government simply must convince the markets that they have a credible long-term economic plan they can implement over a five-to-10-year period, rather than impose a plan that no other country in Europe is pursuing, and where countries like Germany are spending billions of euros more in supporting their economies without any penalty when it comes to borrowing costs.

With UK inflation for October hitting 11.1% yesterday, today’s EU CPI number for November is set to be confirmed at 10.7%.

EUR/USD – currently struggling to push above the 200-day SMA at 1.0440. A close above 1.0430 is needed to push up towards the 1.0600 area. Support all the way back at the 1.0180 area. 

GBP/USD – fairly quiet session yesterday after the push up to the 1.2030 area earlier this week. This is likely to be a huge barrier for any further gains. Support remains all the way back at the 1.1640/50 area.

EUR/GBP – continues to chop between resistance at the 0.8820/30 area, with support still at or around the 0.8690 area.

USD/JPY – need to overcome the 141.00 area to minimise the risk of a move back to the recent lows at 137.65.

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