Asian equity markets are mostly lower overnight following the negative close in the US and Europe, while US Treasury yields edged higher. Fed policymakers reaffirmed the likelihood of further increases in US interest rates, especially after yesterday’s stronger-than-expected retail sales report.
Today’s UK Autumn Statement is expected to take place around lunchtime. The fiscal update will come in conjunction with the latest set of economic forecasts from the OBR (Office for Budget Responsibility). As these are being released only a couple of weeks after the BoE’s latest forecasts, there will inevitably be comparisons. The BoE expects GDP to have fallen in late 2022 and continue to do so throughout 2023. It will be interesting to see if the OBR is more optimistic even after it accounts for new tax and spend measures that will be announced today.
A key part of the OBR’s forecast will be by how much it gauges that public finances have deteriorated since its last update in the Spring. A combination of factors, including lower economic growth and higher interest rates, points to a deterioration even after the reversal of most of the measures announced in September’s mini-Budget. The Chancellor’s focus is expected to ensure that his key fiscal rule for debt to fall as a share of GDP in five years’ time is still met and, more broadly, to restore policy credibility. Reports point to tightening in the order of £50-60bn, with just over half accounted for by spending cuts and the rest by tax rises.
On the spending side, reports suggest that state pensions and benefits could be uprated in line with inflation. Savings will need to come from future cuts to departmental budgets. On the revenue side, it is rumoured that the windfall tax on energy companies may be extended as will be the freezing of inheritance and income tax allowances. An additional consideration will be what the Chancellor intends to do about the Energy Price Guarantee which expires at the end of March. Overall, a significant fiscal tightening may help reinforce the BoE’s message that interest rates may rise by less than markets currently expect.
UK GfK consumer confidence and official retail sales will be released early Friday morning. it was a surprise that consumer confidence rose in October to -47. Nevertheless, it remains very close to its all-time low of -49 and we expect it will have dropped back to the low in November. We also forecast a small bounce in October retail sales after a big fall in September, but the underlying position still looks precarious.
Several central bank speakers will draw attention later today. They include the BoE MPC’s Pill (Chief Economist) and Tenreyro, as well as the Fed’s Bullard and the ECB’s Villeroy. Eurozone October CPI inflation figures are expected to confirm preliminary ‘flash’ estimates of a rise to 10.7% in the headline measure. US data include housing data and the Philadelphia Fed manufacturing survey.
The pound is marginally higher overnight against both the US dollar and the euro ahead of the Autumn Statement later today. The 10-year gilt yield closed at 3.15%, the lowest for two months since before the September mini-budget.
