Daily Brief – Unconvinced

Unconvinced

Markets had already experienced volatility yesterday ahead of Labour Chancellor Rachel Reeves’ delivery of her budget to Parliament yesterday. A gradual but intense sell-off in GBP as the morning European session progressed could be written down to derisking and deleveraging GBP positions moving into the budget. In the days prior to yesterday, Speaker of the House Sir Lindsay Hoyle had chastised the Labour Party for publicising too many details of the budget to the media instead of elected MPs. This was something Chancellor Kwasi Kwarteng, who delivered the Truss mini budget, had fallen foul of and lost favour with Parliament. 

It didn’t seem a fair accusation from the Speaker prior to yesterday’s budget. With the budget speech now in the rear-view mirror it seems more like nonsense altogether. Just taking a look at market reaction yesterday shows that the severe tax and spending hikes planned by this Parliament hadn’t been expected. Borrowing costs rose significantly after the budget but exhibited a high degree of volatility. The UK Gilt market was jostling between the prospect of higher spending versus a magnificent increase in expected debt issuance. 

The net effect of higher bond yields supported GBP during the afternoon session with the morning’s losses recovered. Unfortunately for those selling GBP forward, much of the spot gains have been eroded by a flattening or inverting of the forward curve on GBP crosses. There is a short-term positive growth impact from the budget in light of the sequencing of higher spending now and taxation to follow throughout the course of this Parliament. It is certain that the commitments made in the Labour Party manifesto have been betrayed. However, it will be the job of the House, public and markets to deem whether this new brand of Labour is something they can sustain. 

Discussion and Analysis by Charles Porter

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