UK: Labour Risks Falling To 3rd In Polls With Budget Statement Looming
The gov't faces a difficult few weeks ahead of the 26 November budget in the wake of Chancellor of the Exchequer Rachel Reeves' Downing St. speech on 4 November that refused to rule out manifesto-breaking income tax/VAT/National Insurance increases. While there is likely to have been an element of needing to prepare the ground with the public and markets regarding the all-but-confirmed tax hikes (saying "each of us must do our bit for the security of our country and the brightness of its future"), coming three weeks before the budget means the looming spectre of tax increases will retain a dominant position in the news cycle.
- Comes amid the slow, but sustained decline in support for the centre-left Labour Party in opinion polling (see left chart below). Whereas Labour has trailed the right-wing populist Reform UK for several months, it has generally retained a comfortable advantage over the main opposition centre-right Conservatives. However, with the environmentalist Greens having recorded a spike in support under its new left-wing populist leader, Zack Polanski, largely at the expense of Labour, PM Sir Keir Starmer's party now risks being pushed into third place nationally.
- Should Labour's polling numbers slump even further post-Budget, it will put even greater pressure on Reeves and Starmer, and indeed a significantly negative public or market reaction could make Reeves' position untenable. Data from Smarkets shows bettors assigning a 40.6% implied probability that Starmer leaves office in 2026, with the May local elections viewed as a potential reckoning day for the PM.
Chart 1. General Election Opinion Polling by Party, % and 6-Poll Moving Average (LHS) and Combined Vote Share for Labour and Conservatives in General Elections & Opinion Polling, % (RHS)
Source: More in Common, YouGov, Find Out Now, Opinium, Techne, Lord Ashcroft Polls, Focaldata, JL Partners, Freshwater Strategy, Survation, Ipsos, BMG Research, MNI
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US 10YR FUTURE TECHS: (Z5) Monitoring Support
- RES 4: 114-10 High Apr 7 (cont.)
- RES 3: 114-00 Round number resistance
- RES 2: 113-12/29 High Sep 18 / High Sep 11 and the bull trigger
- RES 1: 113-00 High Sep 24
- PRICE: 112-13+ @ 16:59 BST Oct 6
- SUP 1: 112-12+/01 50-day EMA / 50.0% of Jul 15 - Sep 11 upleg
- SUP 2: 111-26 Low Aug 26
- SUP 3: 111-13+ Low Aug 18 and a key support
- SUP 4: 111-01+ 76.4% retracement of the Jul 15 - Sep 11 bull phase
Treasuries have pulled back from last week’s high print of 112-31+ (Oct 3). Attention is on support at the 50-day EMA, at 112-12+. It has recently been pierced but for now remains intact. A clear break of it would undermine a bull theme and signal scope for a deeper retracement. This would open 111-13+, the Aug 18 low and the next key support. On the upside, initial firm resistance to watch is 113-00, the Sep 24 high. A break would be bullish.
FOREX: JPY Slide Holds, But Gains Could be Limited Above Y150
- JPY slid sharply against all others Monday in the extended response to the surprise victory for Takaichi in the LDP leadership race. Trump congratulated the new Japanese PM, setting the leaders up for their first face-to-face summit on October 28th. Ahead of Takaichi's first formal actions in government, one of her primary policy advisers Honda stated that Takaichi wants the Bank of Japan to proceed "cautiously" on interest rates, and that an October rate hike is "difficult". While the comments appeared to pressure the Bank away from tightening policy, the view that a December hike is not a problem and that the currency is approaching levels deemed too weak helped boost the JPY off lows.
- The EUR traded weaker in early Europe, following the resignation of the French PM Lecornu - and bedding markets in for an extended period of political risk and
budget brinkmanship. French equities also see weakness - with the CAC40 easily the underperformer in Europe. Next major support in EURUSD crosses at
1.1646, the late Sept low. Weakness through here snaps the weak uptrend posted off the August 1st low. - The USD's NY morning fade aided EURUSD and GBPUSD well off earlier lows, helping EURUSD almost entirely erase the PM resignation losses. EURGBP still
traded heavy, however, meaning GBPUSD's rally has the price within range of the Friday high at 1.3486. It's fiscal and political risk that's likely a more primary GBP
driver for the rest of this year - The front-end of the GBP vol curve provide a further signal for market concern over the Autumn Budget. The flatter
front-end of the curve and the building premium for 2m implied vols shows markets building a risk premium into the event. - We see GBP's driver as the fiscal policy mix ahead. The Gilt curve and, in particular, the longer-end has regained a sense of stability after being marked sharply higher at the beginning of September. How valid and long-lasting this proves to be should determine GBP/USD's ability to trade within range of 1.3525 (50% mid-Sept downleg) and make meaningful headway toward the bull trigger of the July 1st high at 1.3789.
- Australia's Westpac Consumer Confidence data is the Tuesday highlight, followed by German factory orders for August. US trade balance data was set for release Tuesday, however the extended government shutdown will keep that figure quiet for now. There remains very little pressure on either side to make concessions and rush toward a conclusion for the shutdown at this point - leaving markets with a core expectation for a further week or so of no Federal government activity.
- Various Fed speakers are due Tuesday, including Bostic, Bowman, Miran and Kashkari - who will be carefully watched for any suggestions that a prolonged government shutdown will hinder the US economy further, and require a more forceful response from the FOMC.
FED: US TSY 26W BILL AUCTION: HIGH 3.695%(ALLOT 3.05%)
- US TSY 26W BILL AUCTION: HIGH 3.695%(ALLOT 3.05%)
- US TSY 26W BILL AUCTION: DEALERS TAKE 28.17% OF COMPETITIVES
- US TSY 26W BILL AUCTION: DIRECTS TAKE 9.23% OF COMPETITIVES
- US TSY 26W BILL AUCTION: INDIRECTS TAKE 62.59% OF COMPETITIVES
- US TSY 26W BILL AUCTION: BID/CVR 3.04
