UK markets are reacting to weekend comments from Chancellor Hunt.
The Spring Budget is due out on Wednesday and speculation on its contents will be a theme for the first part of the week.
So far, all the signs point to a fiscally responsible budget with small tax cuts. Its market impact could be limited.
Monday’s session is off to a quiet start with EURUSD flat, alongside the DAX and US stock futures. UK markets are making the only moves of note, with the FTSE opening –0.3% lower and the Pound slightly stronger with a +0.15% gain against the Euro and the USD. This is likely due to comments out over the weekend from UK Chancellor Jeremy Hunt ahead of Wednesday’s much anticipated Spring Budget. Hunt said he wanted Britain to shift towards a lower-tax economy – suggesting tax cuts were on the agenda – but also stated he would do so “as and when we can afford it” - which suggests any cuts made on Wednesday will be small. “This will be a prudent and responsible budget for long-term growth,” Hunt said.
Budget in Focus
A fiscally responsible budget should keep Gilts from blowing off higher like they did after the Kwarteng/Truss debacle. It should also lead to a stable Pound, which will be caught between the desire for larger tax cuts to stimulate the economy, balanced by the desire for less government borrowing to do so.
“A moderately-sized tax relief package (i.e., one that does not trigger gilts turmoil) can probably give some support to GBP this week, but the spectrum of possibilities is admittedly quite wide,” speculated ING on Monday.
The Chancellor’s options are somewhat limited by new rules requiring government debt to be falling as a share of the economy by the fifth year of forecasts made by the Office for Budget Responsibility.
" It is understood the Treasury has been handed forecasts from the OBR showing headroom of just under £13bn within this target before any new tax or spending decisions are made – significantly less than the £30bn in pre-measures headroom before last year’s autumn statement,” reports The Guardian.
Hunt may raise fund for tax cuts by making increases elsewhere, including a new duty on vaping, and putting up taxes on second-home holiday lets, but this still leaves his coffers relatively empty.
In short, the Spring Budget is shaping up to be quite uneventful, at least in terms of its impact on Gilts, the FTSE and the Pound. Small tax cuts and no significant reliance on fresh borrowing should mean any market reaction is short-term.
Other Events This Week
Monday’s session has no scheduled major events or data releases, but things hot up later in the week. As well as the Spring Budget on Wednesday, Fed Chair Powell will start a two-day testimony on Monetary Policy to Congress. This will be closely watched for any signals ahead of the March FOMC meeting in just over two weeks. No cut from the Fed is now expected until June, but even this could be pushed back further in the year given the jump in economic activity and inflation over recent months. Will Powell even signal a shift to a hawkish stance? This is unlikely, but we may see the Fed’s ‘Dot Plots’ projections price out one cut so that only two are expected this year. This could help the US dollar make further gains in the first quarter.
On Thursday, the ECB rate meeting will be the focus, although there is little scope for any significant announcement. Rates will be kept steady and the message will likely remain the bank are on hold awaiting further data.
Friday will cap off an eventful week with the US Jobs Report. The stakes will be high following last month’s extremely hot readings – another blow off report would send the USD higher still.