Markets
UK Chancellor Healey presented his first budget today. He opened with a reference to the fiscal discipline installed by his predecessor Reeves and stuck with her principles. The government’s headroom against its own borrowing limits eroded from £23.6bn in March to £15bn by the 2029/2030 fiscal year (vs £15.2bn market expectations). Higher UK Gilt yields are to blame. The headroom measures the amount of extra money to spend or cut in taxes without breaking official fiscal targets. New OBR growth forecasts showed a minor upgrade for this year (1.2% from 1.1%) but a rather sharp cut for next year (1% from 1.6%). The 2028 prognosis remained unchanged at 1.6%. OBR inflation forecasts are more striking with UK inflation seen averaging 3.1% this year and 3.4% next compared with the 2.3%-2% forecast from March. The budget deficit is seen gradually declining from 4.2% of GDP in the 2026-27 FY to 3.4% in 2027-28 FY, 2.9% in 2028-29 FY and 2.1% in 2029-30 FY. Over that period, the public debt ratio stabilized around 83% of GDP. Overall, the UK government succeeded in making the budget presentation a non-event from a market point of view by sticking to fiscal discipline and focusing on some short term relief to ease the cost-of-living (energy, housing, higher national living wage). They are mostly paid for by tax rises (savings & property income tax, higher bank surcharge, gambling taxes) and a fuel tax windfall. Overall net borrowing over the 2026-31 period was also raised by £65bn. EUR/GBP holds just above the recent lows at 0.8360. The UK Gilt curve bull flattens in a vote of confidence to the government’s fiscal course. UK yields decline by 1.6 bps (2-yr) to 5 bps (30-yr).
Money markets swapped growing expectations for a back-to-back Fed October rate hike for the status quo at 3.75%-4% tonight in the wake of several (high-profile) policymakers pushing back. The likes of Governor Waller said there’s no rush. Since the below-consensus (but statistically quirked) August PCEs and sub-par September payrolls the deal was virtually sealed. The more recent data flow however, which included September CPIs (quickening to 3.7% headline & 2.6% core) and October PMIs (which put the US economy on the strongest growth spell since 2015, excluding Covid), suggest something else. We expect a similar message from the very near-term future flow (ie. tomorrow’s Q3 GDP growth and September PCEs). With a Warsh-Fed looking at trends rather than individual data points, this matters. It makes the rates status quo a tough sell, one that markets (read: long-term US Treasuries) may only take well if it is a hawkish pause. That would support front-end US yields, which had been recovering in recent days from the October correction lower. A December hike is baked in. The US dollar should benefit from a Fed that is able to increase rates from a position of economic strength. EUR/USD risks breaking below the 1.11 support area with ongoing euro weakness lingering too. In case of sustained technical momentum, we’re looking at 1.0882 (61.8% dollar recovery on the 2025-2026 decline) and the 1.05 region as next references.
News & Views
The Bank of Canada raised its policy rate as widely expected by 25 bps to 2.5% (80% discounted). It’s the first move higher since the easing cycle ended in October of last year. Growth picked up in Canada through the middle of the year and was stronger than expected in the July Monetary Policy Report. The Canadian economy is now expected to grow 1% in 2026, and 2% in 2027 and 2028 with forecasts heavily subject to Canada-US trade relations. In the new outlook, inflation is higher and more persistent than in July. CPI inflation is expected to average 3% in 2027, a percentage point higher, then come down to 2% in the middle of 2028. There could be a need to increase the policy rate further, but given uncertainties, the Governing Council agreed to proceed carefully. Canadian money markets are evenly split on the possibility of a December rate hike.
The Australian Bureau of Statistics published hot inflation numbers this morning. Headline CPI accelerated to 0.8% M/M in September with the Y/Y number rising from 4% to 4.3% (vs 4.2% expected). Housing was the largest contributor to annual inflation in September, rising by 5.2%, followed by transport (+8.7% Y/Y). Both goods and services inflation rose further above the central bank’s 2-3% inflation target, respectively from 4.2% Y/Y to 4.6% Y/Y and from 3.7% Y/Y to 4.1% Y/Y. Trimmed mean inflation, which excludes most significant price changes, rose by 0.3% M/M and 3.6% Y/Y. Today’s figures also included quarterly dynamics with headline CPI up 1.3% Q/Q (from 0.6%; 3.9% Y/Y). That’s way stronger than the RBA’s 0.9% estimate in its August projections and probably seals the deal on an RBA rate hike next week (86% market implied probability from 60% yesterday). AUD/USD tested the 200d moving average around 0.7050 which is the best level in over a month.
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