UK FISCAL: Wider Budget and Political Implications of Today's Data (1/2)
Sep-19 13:48
- Chancellor Reeves already had a tough task to maintain her fiscal rules and placate the Labour backbenchers without breaching the manifesto commitments to not increase income tax, employee NIC or VAT. Today's fiscal data make that task look even more difficult. As do the media reports recently that Chancellor Reeves wants to explore policies which lower inflation (but hence cost money!)
- Recall that the government already had to water down its welfare bill and has partially rolled back on the winter fuel payment. Both of these are seen partially driven by a poor performance at the local elections and the rise of Reform UK in the polls.
- Even before today's data we had seen estimates from the sellside of around GBP25-30bln needing to be raised (the IFS estimated more like GBP40bln). We assume that today's GBP11.4bln YTD surprise in PSNB was not anticipated in these assumptions. It's not a one-to-one relationship, but it is likely that these estimates will be revised up following today's data.
- The market was also not particularly content with the small GBP9.9bln headroom left after the Spring Statement (which matched that of last year's Budget). The OBR noted at the time that it thought there was only a 54% probability that the stability rule would be met and a 51% probability that the investment rule is met.
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EUROPEAN INFLATION: Analysts Stick To Previous ECB Calls After July Final HICP
Aug-20 13:40
Analysts aren't unanimous but on balance view the final July HICP release as favourable in terms of the ongoing disinflation process in the Eurozone. They stick to their previous calls on the ECB rates path ahead. Some highlights:
- Commerzbank: "Volatile service prices distorted the core rate slightly downward [...] As this effect is unlikely to be lasting, we are adjusting the core rate upwards accordingly. Without these volatile components, the core rate would therefore have been 0.24% in July (seasonally adjusted month-on-month rate). [...] Even with a slightly weaker core rate, year-on-year inflation is likely to remain above the ECB's forecast in the coming months. We therefore consider further interest rate cuts by the ECB to be unlikely."
- Goldman Sachs: "Looking through the Easter-related distortions to services inflation, our summary indicator of sequential underlying inflation has been broadly stable over the past few months, but ticked down in July by 5bp to 0.18%mom. The change in our sequential summary measure reflects a sequential deceleration across most of the metrics we track"
- JP Morgan: "Our inclination is to view today’s report as constructive: we do need a run of soft monthly core price gains but see a good chance of this. The firmer currency, possible China deflation effects and, crucially, the moderation in wage growth argue in this direction [...] If core goods inflation sees payback in August, Euro area core inflation could slip to 2.1%oya and remain at that level in September. If correct, it would undershoot the ECB staff forecast of 2.3%oya for 3Q25. We then see it slipping below 2%oya early next year. [...] We continue to expect a further ease but have delayed this recently to October. This does, however, require the ECB to take more seriously the easing bias already in the staff projections."
EURIBOR OPTIONS: Put Condor Buyer
Aug-20 13:37
ERH6 97.9375/97.8125/97.6875/97.5625p condor, bought for half in 7.5k.
EQUITIES: US Cash Opening Calls
Aug-20 13:26
SPX: 6,408.4 (-0.0%); DJIA: 44,953 (+0.1%/+31pts); NDX: 23,338.8 (-0.2%).
