US TSY FUTURES: Net Short Setting Most Prominent On Wednesday

• In the equity space, the trend condition in S&P E-Minis is unchanged, it remains bullish and the contract has started this week on a firm note. Short-term resistance and a bull trigger at 6128.75, the Jun 11 high, has recently been breached. The clear break confirms a resumption of the uptrend that started Apr 7. The 6200.00 handle has been cleared too, this opens 6277.50, the Feb 21 high and bull trigger. Key support is at the 50-day EMA - at 5964.66. First support lies at 6087.08, the 20- day EMA.
• Trend signals in EUROSTOXX 50 futures remain bearish, however, the recovery from the Jun 23 low appears to be a reversal - for now. Price has traded through the 20- and 50-day EMAs. A clear break of both averages would strengthen a reversal theme. This would open 5486.00, the May 20 high and bull trigger. On the downside, a breach of 5194.00, the Jun 23 low, would reinstate a bearish theme.

The OBR forecast evaluation report is out, some highlights below. Note that this is an annual report, so is not hugely different to what we have seen in recent years. Highlights below:

• "The updated assessment of our forecasting record since 2010... shows that the OBR’s economic and fiscal forecasts have tended to be somewhat pessimistic in the near-term and optimistic in the medium term."
• "The OBR’s forecast performance over the past twelve years has been similar to that of other UK external forecasters, which exhibit a common pattern of near-term pessimism and medium-term optimism."
• "On average, OBR central (point) forecasts have underestimated annual real GDP growth at the one-year horizon (by 0.4 percentage points) and overestimated it at longer horizons, by an average of 0.3 and 0.7 percentage points at the two- and five-year horizons, respectively (top row in Table 2.1). External forecasters, on average, have also underestimated GDP growth at the one-year horizon (by 0.5 percentage points) and also overestimated it at the five-year horizon, albeit by a slightly smaller margin of 0.6 percentage points."
• "OBR forecasts for CPI inflation have, on average, been in-line with outturn, while two- and five-year ahead forecasts have, underestimated inflation by 0.3 and 0.5 percentage points, respectively. External forecasters have, on average, tended to overestimate inflation at the one- and two-year horizon and to underestimate it at the five-year horizon to a similar extent as the OBR forecasts. "

• But perhaps even more significantly, the precedent this sets is that it is going to be very difficult for the government to cut spending. Which was always the case to some extent but almost a year ago when the government entered office (4 July 2024) it was thought that the large majority of the Labour party would make reform easier. If it is this hard for the government to control spending so soon after such a large majority, it makes it even harder as the parliament progresses and the next election starts to approach.
• Of course, on top of using up half of the headroom with these U-turns on spending cuts, yields are higher than at the time of the last Budget, inflation is still relatively sticky while the growth and labour market appear to be deteriorating. With more spending cuts looking increasingly difficult, this sets up the potential for more tax rises in the Autumn Budget (with the fiscal rules unlikely to be modified while Reeves is Chancellor. The market (and consumers) are likely to continue to worry where these tax rises will come, which isn’t going to be great for confidence over the next few months.