UK FISCAL: Gov't Risks Backbench Ire w/Spring Statement Welfare Reforms
Following the Spring Statement, Paul Johnson of the IFS has delivered an initial response arguing that the extreme fine-tuning of welfare policy to ensure exactly the same fiscal headroom as October presents risks in the event of economic shocks, concluding "What the Chancellor has all but guaranteed is another six months of damaging speculation and uncertainty over tax policy. That didn’t go well between last July’s election and October’s Budget. I fear a longer rerun this year."
- The balancing of fiscal headroom from Oct to now via cuts to welfare spending gives the impression that the gov'ts actions were in favour of restoring this number rather than enacting thought-out and necessary reforms to disability benefits in the UK.
- Gov't estimates suggest "there will be an additional 250,000 people (including 50,000 children) in relative poverty after housing costs in 2029/30 as a result of modelled changes to social security, compared to the baseline projections,".
- The Spring Statement is not voted on in Parliament. However, any changes to tax or gov't spending require parliamentary approval. Parliament will also have to vote on the welfare changes announced by Work and Pensions Secretary Liz Kendall last week.
- The gov'ts sizeable working majority of 168 seats means that a massive backbench rebellion would be needed to defeat the plans. Nevertheless, with these reforms, the gov't is using up its credit with its backbenchers early in the parliamentary term, risking further rebellions down the line if the burden of balancing the books is seen to fall on the vulnerable.
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EGBS: Supported By Post US Open Equity Weakness
Core FI has been supported by the latest round of equity weakness, with Bund futures gaining ~30 ticks since the US cash open to move back to 132.30. Today’s session high of 132.50 remains untested for now.
- 10-year peripheral spreads to Bunds unsurprisingly widen, with the BTP/Bund spread now back at 109bps (+0.5bps on the session).
- SPGBs underperform peers slightly (+1bp today at 63bps), with today’s 15-year syndication mandate weighing at the margin. We expect a transaction tomorrow and pencil in a wide E5-10bln range. Meanwhile, headlines noting that the government will propose writing off E83bln of regional debt were not market moving, having been part of an agreement signed by the government in 2023.
BONDS: MNI Europe Pi: Flat/Short Into Quarterly Rolls
We've just published our latest update of European bond futures positioning (PDF):
- Going into the quarterly roll (March to June), structural positioning across European futures contracts is flat/short.
- First notice for Gilts is Feb 27, with the roll well underway as of early Monday afternoon; for Eurex it's Mar 6.
- Last week's trade saw short-setting and long-reduction, with a sharp non-roll related drop in Eurex OI Friday.
EUROPEAN INFLATION: PCCI Eases Slightly In January
The ECB’s persistent and common component of inflation metric fell 5bp to 2.11% in January, still slightly above the 2024 average of 1.97% but broadly in line with the 2% inflation target. The data should support Governing Council dove’s confidence in the inflation outlook, even as domestic spot inflationary pressures remain evident.
- PCCI is the ECB’s preferred measure of medium-term inflation pressures, and is constructed “by estimating a dynamic factor model that extracts the persistent and common component of inflation from granular price data at the item-country level”.
- Core PCCI (i.e. excluding energy and food) was little changed at 1.90%, while Supercore (“which picks out those items that are estimated to co-move with the business cycle”) eased a tenth to 2.7%.
- The weighted median metric saw a notable 3 tenth increase to 2.8% for its highest since May 2024. Meanwhile, the 10% and 30% trimmed mean series were each 2.5% Y/Y.
