UK FISCAL: How realistic is GBP21.7bln headroom? GBP8.6bln is questionable...
We flag three measures that made the GBP21.7bln headroom calculation optimistic, in our view. These sum to GBP8.6bln, so without them headroom would be GBP13.1bln - lower than the GBP15bln market estimate. And to clarify these are policy measures specifically introduced in this Budget (not including efficiencies and measures announced in the Spring Statement or earlier):
- GBP2.2bln from reversing the energy bill cuts (will they really raise energy bills substantially heading into an election? See previous coverage)
- GBP3.95bln from further efficiencies and savings in departmental spending (RDEL).
- GBP2.415bln from "HMRC: Further measures to close the tax gap".
On top of that we would also caution that despite the productivity growth downgrade 1.0% still seems on the more optimistic side. And the 2026 growth forecast in particular of 1.4% (above the BOE's 1.2% and Bloomberg consensus of 1.1%) also looks optimistic to us.
- We won't include it in this calculation, but growth-enhancing capital investment has been brought forward. So that also means there is GBP1.525bln less in FY29/30 - that one seems more legitimate but doesn't really chime with Reeves' messaging.
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US DATA: Redbook Retail Series Maintains Solid Growth Through Most Of October
Retail sales maintained a 5.4% Y/Y month-to-date growth pace through the 3rd week of October, with a 5.2% rise in the latest week (5.0% prior), per the Johnson Redbook Retail Sales Index. This is close to retailers' targeted 5.6% gain.
- We await the Chicago Fed's CARTS preliminary ex-auto retail sales estimate for October, which will be out Friday, but judging from Redbook thus far it looks like another solid month (at least in nominal terms). Of course we didn't get the September "official" Census Bureau report on Oct 23 due to the government shutdown, and it's unclear how the October data will be affected.
- The report suggests that solid Halloween-related sales bode well for holiday shopping activity to end the year: "Sales of Halloween-related merchandise are increasing as the month goes on. Retailers report that cooler weather in many regions has driven steady demand for seasonal clothing. Halloween often serves as an indicator for holiday sales in November and December. If shoppers are willing to spend more on Halloween items, it often suggests a positive outlook for consumer confidence, which may lead to increased spending later in the year. To get a head start on the holiday season, some stores have begun stocking Christmas items alongside Halloween products. Additionally, many retailers have started reducing prices on Halloween merchandise earlier than usual in order to attract shoppers to higher-margin items."
GILT PAOF RESULTS: GBP375.0mln of the 1.125% Sep-35 linker sold.
- GBP375.0mln have been on offer.
- This leaves GBP14.651bln of the gilt in issue.
MNI:US AUG FHFA HPI SA +0.4% V +0.0% JUL; +2.3% Y/Y
- MNI:US AUG FHFA HPI SA +0.4% V +0.0% JUL; +2.3% Y/Y
