Markets
The UK budget announcement by Chancelor of the Exchequer Reeves was hoped for to bring some clarity on the future path of UK Public finances and provide markets with some insights on what to expect on the UK economic performance over the coming years. However, the political communication process was unexpectedly perturbed by an early release by of Office of Budget Responsibility’s (OBR) economic assessment based on the measures to be announced by the Chancelor, triggering additional market volatility. Regarding the heart of the matter, the budget, not unexpectedly, brought somewhat of a mixed message. The closely watched fiscal buffer (set against the rule that day-to day public spending has to be covered by tax revenues by 2030) was raised to £22bn compared to £9.9bn in the March statement. This buffer was mainly driven by a £26bn of additional taxes, including a freezing of income tax thresholds for three years from 2028-29, a levy on high valued homes, an increase in the tax on savings and property income,… . Spending over the horizon is raised by £11bn. The OBR expects taxes as a share of GDP to rise to an all-time high of 38% in 2029/30 (35% in 2024/25). Stil the combination of higher taxes and higher expenses is expected to reduce the deficit from 5.1% last year and 4.5% this year to 1.9% in 2029/30. Debt as a share of GDP is seen at 95% this year and holding at 96% at the end of the decade. Turning to growth and inflation forecasts, OBR raised its forecast for inflation this year (3.5% from 3.2%) and next year (2.5% from 2.1%) and expects it to return to 2% in 2027, one year later than forecasted in March. Growth is slightly upwardly revised for this year (1.5% from 1.1%), but downwardly revised for next year (1.4% from 1.9%). MT average growth was scaled back from 1.8% to 1.5%. UK gilts and sterling traded volatile after the unexpected OBR forecast release and the address of Chancelor Reeves before the House of Commons. However, for now, the market apparently sees some tentative bright spots as the higher fiscal buffer helps to reinforce a perception of fiscal sustainability. At the moment, markets don’t push for higher UK risk premia. Gilts are rebounding with yields easing between 3 bps (2-y) and 6.5 bps (30-y). After touching an intraday top near EUR/GBP 0.8818, sterling also rebounds to currently EUR/GBP 0.877, admittedly still in nervous trading. UK equities reversed an initial 0.6% intraday dip to currently gaining 0.8% on the day. (FTSE 100). Markets (marginally) further raised expectations on a December rate cut (90%) but still doubt whether there will be room for more than one additional step next year.
News & Views
The Norwegian economy grew by 0.1% q/q (or 1.2% y/y) in Q3 of this year, the statistics agency said in its flash estimate. That’s a deceleration from Q2’s downwardly revised 0.5% (or 2% y/y). Including the country’s vast offshore energy and shipping sector, GDP expanded by 1.1% compared to 1.2% in the previous quarter. The growth figures undershot market and the central bank’s expectations but were to a certain extent affected by one-offs (eg. fishing and aquaculture). Consumption of households, for one, remains a solid driver of the economy, growing by 0.9% q/q. With details less underwhelming than the headline figure suggests, markets aren’t stacking up bets for future rate cuts by the Norges Bank. The central bank had projected an extremely gradual easing pace from the current 4%, penciling in one rate cut annually over the next three years due to sticky inflation. Norwegian money markets aren’t expecting a move at least through May of next year. EUR/NOK trades stoic around 11.84.
The ECB in its Financial Stability Review warned for a series of risks including stretched valuations in equities that do “not appear to reflect persistently elevated vulnerabilities and uncertainties”, a meltdown of the UST market over spiraling borrowing by the Trump administration and a new European sovereign debt crisis originating from member states “with more fragile political landscapes” that fail to address “weak fiscal fundamentals” (they mean France). But it also singled out the risks related to the Dutch pension reform that entails a shift from defined benefit to defined contribution. In the sector, Dutch pension funds account for about 65% of sovereign bond holdings. The impending shift in practice means lower demand for long(er)-dated bonds in a time where supply is abundant due to structural deficits, climate, defense and infrastructure spending. The transition will be split across the next two years. But the early part of 2026 will be a key test, with reportedly some 35% of the Dutch pension sector’s assets then due to switch..
 economic assessment based on the measures to be announced by the Chancelor, triggering additional market volatility.){kind=link}